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Finalized IRS Repair and Capitalization Rules

By January 22, 2015No Comments

Final regulations on materials and supplies:

  • $200 per item threshold for materials and supplies.
  • Standby emergency spare parts are now included in the definition of material and supplies.
  • Election to capitalize materials and supplies now limited to rotable, temporary, and standby emergency parts; and
  • Materials and supplies are subject to de minims safe harbor.
  • Gain on the disposition of a material or supply is ordinary income.

De Minims Safe Harbor Election

  • If individual items purchased are less than $500 (or $5,000 with applicable financial statement (AFS)), item can be expensed and not capitalized.
  • Must make annual election Reg. §1.263(a)-1(f)(1) and attach to tax return when filing. The election is irrevocable.
  • A taxpayer with an AFS must have a written accounting procedure for non-tax purposes effective at the beginning of the tax year describing their expense.
  • A taxpayer without AFS must also have an accounting procedure in place; however it does not need to be written.

Safe Harbor for Small Taxpayers with Buildings

  • For taxpayers that have $10 million or less in annual gross receipts and make improvements on a building owned or lease that has an unadjusted basis no greater than $1 million, a new safe harbor is available.
  • Under the safe harbor, taxpayers are not required to capitalize building improvements if the total amount does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building
  • This election must be made annually and attached to a timely filed return and is irrevocable.

Above is a summary of some of the new IRS regulations for repairs and capitalization, but there are many other changes not mentioned here. For more detail, or if you have any questions regarding these changes and would like to talk to a professional, please call Lindsay and Brownell at (858) 558-9200.

If you would like more information regarding these regulations, here is a link to an article that goes into more detail:

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