IRS Tangible Property Repair Reg. & Capitalization Policy

 IRS Tangible Property Repair Regulations & Capitalization Policy

On September 13, 2013, the IRS released the final tangible property repair regulations (T.D. 9636). Included in this guidance is the modification of the De Minimis Rule from the 2011 temporary regulations. This is the most important provision as now it applies not only to improvements, but also to property that the taxpayer is permitted to deduct in the year purchased. This rule is effectively a two-tier rule that applies different requirements for taxpayers to follow. To qualify for the first tier, you must:

  • Prepare an applicable financial statement, which is an audited financial statement or one filed with a state or local government.
  • Have in place at the beginning of the tax year, a written accounting policy for expensing property under a specific dollar amount.
  • And follow that written policy, whereby expensing on the financial statements applicable amounts.

Qualifying for this safe harbor allows property to be expensed up to $5,000 per invoice or per item as substantiated by the invoice.

Those businesses that are unable to prepare applicable financial statements may be eligible for the second tier. To qualify for this safe harbor, you must simply:

  • Have in place at the beginning of the tax year, a written accounting policy for expensing property under a specific dollar amount.
  • And follow that written policy, whereby expensing on the financial statements applicable amounts.

Qualifying for this safe harbor allows a taxpayer to expense property up to $500 per invoice or per item as substantiated by the invoice. Taxpayers qualifying for the second tier of the safe harbor should include in their policy:

  • The deduction of amounts paid for property costing less than $500 on the books and records.
  • The deduction of amounts paid for assets with an economic useful life of 12 months of less on the books and records. 

That being said, it is imperative that businesses have in place on January 1, 2014, a written accounting policy so as to take advantage of this safe harbor election.

 Capitalization Policy Example below –

FIXED ASSET CAPITALIZATION POLICY

Adopted: ________ 20__

_________________________ will regard fixed assets as capitalized when all of the following criteria are met:

  1. Assets purchased, built or leased have useful lives of one year or more.

  1. The cost of the asset (including facilitative costs) is $500 or more. Assets whose cost is less than $500 will be deducted as an expense in the current year or in the year used. 

  1. The cost of repairing or renovating the asset is $500 or more and prolongs the life of the asset.

Other Considerations:

  1. REPAIR is an expenditure that keeps the property in ordinary efficient operating condition. The cost of the repair does not add to the value or prolong the life of the asset. All repair expenditures are charged to the appropriate department and account.

  1. IMPROVEMENTS are expenditures for additions, alterations and renovations that appreciably prolong the life of the asset, materially increase its value or adapt it to a different use. Improvements of the nature are capitalized.

Examples of Repairs vs. Improvements

Repairs = Expenditures

Improvements = Capitalized Assets

All items—life less than one year

Life of more than one year

All items under $500

All items $500 or more

Property maintenance, wall repair

Property maintenance, wall repair

Replacement of machine parts to keep machine in normal operating condition

Replacement of motor and parts that
prolong the useful life

Property restoration (rebuilding) for normal operations

Property restoration for something different or better pipes or sewer

Existing building repairs pipes or light fixtures

Major replacement of wiring, lighting, pipes or sewer

Patching walls, minor repair of floors, painting, etc.

Installation of floor, wall, roof, wall-covering, etc.

Patching driveways

New driveway or major repair

Cleaning drapery, carpet, furniture

New drapery, carpets, furniture

Depreciation Method—MACRS over the following useful lives:

Buildings

39 years

Building Improvement

15 years

Furniture and fixtures

7 years

Vehicles

5 years

Office Equipment

5 years

Computer Equipment

5 years