New Repair Regulations Offer Small Businesses (Some) Relief
Addressing years of conflicting case law and cumbersome compliance requirements, the IRS recently issued simplified guidelines for tangible property repairs and improvements allowing small businesses to more easily realize deductible expenses and thereby minimize their tax liability.
This February, the IRS announced additional guidance for implementing the tangible property repair regulations with small businesses in mind, providing firms with total assets or average annual gross receipts under $10 million with a more approachable set of reporting procedures.
Many of the final tangible property tax policies rolled out in September 2013 remain largely intact, but their implementation has been simplified to help smaller organizations deduct expenses they might have previously capitalized on a prospective basis. Qualified organizations are no longer required to submit a Form 3115 for each automatic accounting change request, easing compliance for small firms and their tax preparers.
Despite these relaxed rules, some challenges remain in the new regulations, especially regarding material and supply deductions.
Safe Harbors and Deductible Expenses
Prior to the revised regulations, many small businesses cautiously refrained from expensing any repair costs over a certain threshold, and instead indiscriminately capitalized repair outlays as improvements in order to avoid auditor scrutiny. The introduction of a de minimis safe harbor eliminates any accounting obstacles for inexpensive repairs, allowing expenses under $500 or $5,000 (depending on whether a firm has an applicable financial statement and capitalization policy) to be deducted as a business expense without the need to undergo a facts and circumstances analysis. Important to note, is that expenses over the de minimis threshold are not automatically required to be capitalized, and can be deducted if firms prove the outlay meets the right repair or maintenance criteria.
The facts and circumstances analysis used to determine the tax status of an expense also represents a significant departure from previous guidelines, providing multiple alternatives to assist small businesses. The safe harbors for small business taxpayers and routine maintenance are structured to help firms quickly and accurately determine tax treatments for their expenditures. Even when firms must submit tangible property expenditures for the facts and circumstances analysis, the new IRS clarifications have made the process more taxpayer-friendly. The guidelines do not deviate from historical tax policy, but sidestep conflicting case law and vague property unit categorizations to reduce the administrative burden on small businesses, without devoting significant resources to tax compliance.
Although the new repair regulation adjustments offer a handful of valuable benefits, small businesses will continue to face some degree of regulatory uncertainty. The rules now include one definition of materials and supplies as an amount that does not exceed $200, which may not conform to businesses' standard accounting practices. The de minimis safe harbor, however, may allow businesses to deduct a portion of these expenses (especially if the AICPA is successful in its fight to raise the safe harbor for smaller businesses to $2,500).
Even with modifications to the facts and circumstances analysis, some ambiguity lingers. Auditors enjoy wide discretion, and while the IRS has moved past viewing the safe harbor limit as the absolute threshold for deductible expenses, the burden of demonstrating compliance rests firmly with businesses. The rules will likely mature over time, and guidance will be developed to address remaining gray areas, but in the near term organizations must stay diligent in order to correctly address their tangible property tax liabilities.
Painlessly Adapting to the New Guidelines
With the new tangible property regulations simplifying and streamlining the process for claiming business deductions, many traditional corporate tax and accounting strategies no longer apply. At the very least, they may no longer be the most efficient use of organizational resources.
Implementing a fixed asset solution offers several advantages including the ability to customize fields according to your organizational needs. You can also link asset repaired (parent) and assets used to perform the repair (children) into a logical group to make tracking and reporting of repair groups more efficient. With this program you can easily switch between capital asset treatment and expense by adjusting depreciation amounts. Learn more about how Bloomberg Tax Fixed Assets software helps organizations efficiently track repairs for tax and accounting purposes, and maintain compliance with frequently changing regulations. For more information about the recent updates to the repairs regulations, watch our new webinar, Tangible Property & Repairs Regulations: Opportunities You Don't Want to Miss.Download Webinar
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