The IRS and taxpayers have been at odds for years about how to determine whether an expenditure should be capitalized or treated as a repair and maintenance expense. Last year, the IRS published final rules - informally known as the "repair regs" - to provide some clarification. Taxpayers who own fixed assets - equipment, building, or even materials and supplies - are required to be in compliance with the repair regs for the tax year beginning in 2014.
Under the old capitalization rules, an expenditure that increased a property's fair market value had to be capitalized. Many taxpayers equated an increase in fair market value with the dollars they spent. So, many large dollar items were capitalized based on dollars spent.
Under the new rules, an expenditure's cost is no longer a test for capitalization purposes. This provides more opportunities for items to be expensed. Therefore, taxpayers who have overcapitalized in the past, especially with building and leasehold improvements, have the greatest opportunities to put tax dollars back in their pockets. However, this opportunity is only limited to the 2014 tax return.
Here are the greatest opportunities for you to save money on your 2014 tax return. It is worth noting that these items do not have to conform to GAAP, as this is a tax only concept.
- Capitalized repairs - You have a limited opportunity to look back at your prior year depreciation schedule and apply the new rules to determine whether an item that was previously capitalized should have been expensed. The cumulative adjustment will be taken on your 2014 tax return, which could result in significant savings.
- Roof membranes write-offs - Eighty percent of roof expenditures are considered replacement of the roof membrane. Previous and current capitalized membranes can now be written off in the current year as a previously capitalized repair.
- HVAC write-offs - Taxpayers rarely replace their total HVAC system; they usually replace parts of the overall system. So, many previously capitalized HVAC units were probably individual units. These items can now be written off under the new bright line tests.
- Partial disposition of a building or other asset component - The IRS is reversing 30 years of tax law by allowing you to write off the remaining tax basis of retired, replaced, or abandoned components of buildings or other assets (i.e. roofs, windows, etc.).
- Demolition and removal cost write-off - You can now deduct demolition and removal costs incurred during the disposition of a building or other asset component (i.e. cost to remove old roof, remove old machine).
- Remodel rules - There are tremendous opportunities for taxpayers who have previously completed or are planning remodeling of office or retail space. Under the new rules, most items can be expensed rather than capitalized.
- No future depreciation recapture - If a disposed asset or a previously capitalized repair is removed from your fixed asset schedule, there will not be any depreciation recapture when the asset or business is sold, thus generating significant tax savings. This is especially true even if the removed asset has been fully depreciated.
The above are some of the numerous opportunities under the new repair regs that can save you tax dollars and protect your business going forward. Many of these items are time-sensitive and you can only take advantage of them on your 2014 tax return, so time is of the essence. Please contact us for help in determining the best opportunities for your business.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.