In September 2013, the IRS issued final guidance regarding capitalization of expenditures related to tangible property for final regulations that became effective Jan. 1, 2014. The gist of guidance seems to indicate all expenditures should be capitalized unless there is an exception or de minimis safe harbor rule to follow.
Under the guidance, material and supplies expenditures will need to be analyzed to determine if the expenditures are below the thresholds for capitalizing. If they are not, an accounting method change (Form 3115) will need to be filed along with the determination of a 481(a) adjustment. Routine maintenance expenditures will need to be analyzed as well to determine if the safe harbor rules are met for expensing and an annual election will need to be filed each year the safe harbor rule applies. Repair costs will also need to be analyzed against the BAR (Betterment, Adaptation or Restoration) test to determine if the cost can be expensed or capitalized.
The guidance set safe harbor thresholds of $5,000 or $500 for acquisition or production of units of property. For taxpayers with an applicable financial statement (generally, an audited financial statement) and a written capitalization policy in place at the beginning of the year, the units of property acquired or produced for $5,000 or less can be expensed; taxpayers without an applicable financial statement have a $500 threshold.
Under the final regulations, a partial disposition of a unit of property can now be deducted in the year of disposition. For example, if a taxpayer replaces the roof of their building, they can deduct the remaining tax basis of the original roof in the year of replacement instead of continuing to depreciate the original roof cost over the life of the building.
In order for taxpayers to be compliant with the final regulations, they will need to analyze their tangible property expenditures against the final regulations as well as determine if their 2014 tax return should include a safe harbor election, a change of accounting method Form 3115, or both.