‘Repair Regs’ could help businesses renovate

In late September, the Internal Revenue Service and Department of the Treasury issued the final tangible property regulations which establish the federal tax standards for costs incurred to acquire, maintain or improve, and dispose of tangible property. While the release of the “Repair Regs” may have gone unnoticed by the average taxpayer, corporate tax professionals took notice – and with good reason. These rules will affect almost every corporate taxpayer with fixed assets, such as buildings, mechanical systems or transmission or pipelines, including those that invest in repairs or renovations to buildings, manufacturing plants and equipment.

The final repair regulations are aimed at reducing confusion over whether certain expenses should be deducted as a repair or should be “capitalized” – meaning recognition of the expense would be delayed and recorded as a long-term asset.

Many of the changes are favorable for taxpayers and could benefit companies as they head into 2014. The final regulations adopt the same general framework as the 2011 temporary regulations and retain many of the same provisions. However, the IRS and Treasury made several significant changes in the final regulations that taxpayers should review carefully.

SPONSORED CONTENT

Commercial Solar is a big investment, but not an overwhelming one

Solar offers a significant economic benefit for commercial property owners while also positively impacting the environment and offering a path to compliance for new municipal requirements like Energize Denver. A local, experienced solar installer will help you navigate the complexities of commercial solar to achieve financial success for your project.

De Minimis Rule: Safe Harbor, $5,000 Threshold. The changes to this provision took a rule that was largely unworkable and made it manageable. The de minimis expensing rule addresses whether a company can follow its book minimum capitalization policies for tax purposes. Under the final regulations, rather than requiring a company to calculate an aggregate ceiling as part of the determination, it can use a straightforward per-item safe harbor threshold of $5,000 or less, as long as all requirements of the rule are satisfied.

Election to Follow Book Capital Improvement Costs. The final regulations permit a taxpayer to elect to follow its book capitalization policy for improvement costs with respect to amounts that were capitalized on its books and records for the tax year – a choice some companies, might find beneficial for a range of reasons. Making this election may help reduce the administrative burden associated with book-tax differences or possibly mitigate IRS controversy on examination.

The election process is fairly straightforward. A statement is attached to the taxpayer’s timely filed original federal tax return (including extensions) for the tax year in which the improvement is placed in service. Once made, the election may not be revoked; a company making the election will be unable to treat the capitalized items as repairs by changing methods in a later year.

Routine Maintenance Safe Harbor. Routine maintenance to buildings is now included under the repair regs, but the period during which a taxpayer must reasonably expect to perform the relevant activities more than once is limited to 10 years.

Limited Relief for Materials and Supplies. In a significant change from the temporary regulations, the final regulations do not permit a taxpayer to capitalize and depreciate materials and supplies unless they are “rotable” – meaning they can be repeatedly and economically restored to fully serviceable condition; temporary; or standby emergency spare parts. This may present challenges for those companies that capitalized those items for book purposes.

Proposed Partial Disposition Regs. Some of the most important changes in the final regs relate to dispositions of building property, including components. The rules have been completely revamped. The proposed regulations explicitly provide that the unit of property generally consists of an entire building, rather than each of its structural components. Thus, a taxpayer is not required to recognize a loss on the disposition of a structural component of a building as was the case under the temporary regulations. The 2011 temporary regulations would have necessitated placing building property into general assets accounts to avoid this result. That is not the case under the proposed rules. For all non-building property, the proposed regulations permit a taxpayer to recognize a loss when part of the asset is sold or scrapped simply by recognizing the correct amount on the tax return for the year.

Companies should move quickly to understand all of the new rules and take steps to comply before Jan. 1.

Peter Baltmanis pbaltmanis@kpmg.com, is a principal in fixed asset services and cost segregation serving clients in KPMG’s Denver office. Eric Lucas, ejlucas@kpmg.com, is a principal in the income tax and accounting group of KPMG’s Washington National Tax Practice.