Units of Property Eligible For Expensing Under IRS's Repair Rules
Expenses for some tangible property that were previously required to be capitalized and depreciated may now be expensed under IRS's so-called repair regulations, two EY practitioners said. Final rules the Internal Revenue Service issued in September 2013 provided a new definition of “material” and “supply” and said those items are now deductible, David Kirk, executive director at EY LLP, said on a June 4 Bloomberg Tax webinar.
Big Break From Past
In particular, EY partner Scott Mackay, pointed to the inclusion of a unit of property that has an acquisition or production cost of $200 or less in the new material and supply definitions as one of the wins for individuals, estates and trusts that must deal with the new guidance.
“This is one where the definitional change is a big break from past law, and people are taking advantage of it,” Mackay said on the webinar.
Previously, under the tax code and regulations, those units of property were required to be classified as a capital asset, subject to allowance and depreciation. Under the new rules they come under materials and supplies, and can be expensed and deducted.
Restoration Rule Override
A “pressure relief valve” also was added on the major component rule relating to routine maintenance, Mackay said. He called it an override to one of the restoration standards found in the rules.
“The rule says if I replace a major component or substantial structural part, that is capitalizable as a restoration—unless that it is something I expect to do more than once during the class life of the property or during a 10-year period for building property,” he said.
It means, for instance, that an expense for a vehicle with a high-wear part can be converted from what would otherwise be an item that must be capitalized into deductible routine maintenance.
The repair rules are much broader than just figuring out what a repair versus an improvement is, Mackay said. In essence, they deal with the entire life cycle of tangible property. That means that acquisition, production, improvement or disposition of tangible property will be impacted.
While expensing versus capitalizing is an age-old dilemma, the rules have thrown a new wrench into the works, raising the question of whether the new definitions will also require an accounting method change.
“Lots of folks are finding themselves filing a method change basically to just continue doing what they have done in the past,” he said.
This update can be found in the Bloomberg Tax's flagship daily news service, Daily Tax Report®, June 4, 2015. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the Daily Tax Report today. Learn more »