The new repair regulations issued by the IRS will likely have some affect on the bottom line of most businesses. Therefore, it is extremely important to become familiar with these regulations and to have some kind of understanding on how the regulations could affect your business. Different questions have arisen that have had taxpayers pondering the IRS interpretations. Below is a quick synopsis of how the repair regulation pertaining to the de minimis rule should be interpreted.
There has always had some sort of confusion differentiating between capitalizing an asset and deducting repairs. The new regulations were issued in an effort to clarify the confusion and determine uniform methods of differentiating a deduction from capitalization.
The temporary regulations were scheduled to take effect January 1, 2012. The IRS, however, announced through Notice 2012-73 that they were pushing back the effective date to tax years beginning on or after January 1, 2014. Final regulations are scheduled to be released some time during this year which should provide more clarity on the subject. The additional extension will allow most taxpayers time to plan accordingly.
One of the subjects for the repair regulations is the deductibility of materials and supplies. The temporary regulation provides rules regarding the tax year for deducting materials and supplies, as well as, a de minimis rule for taking advantage of the deduction. A taxpayer can elect to apply the de minimis rule and claim a deductible expense in the year the cost of materials or supplies are paid or incurred.
The de minimis rule allows a taxpayer to deduct amounts that were paid or incurred to acquire materials and supplies if the taxpayer has an Applicable Financial Statement (AFS), written accounting measures for deducting amounts paid or incurred for the materials and supplies under certain dollar amounts, and treats such amounts as expenses on the taxpayers AFS in accordance with its written accounting procedures. There is an overall ceiling that limits the total expenses that a taxpayer may be able to deduct under the de minimis rule.
The de minimis rule, therefore, allows eligible companies to establish a threshold amount below which any materials and supplies may be expensed. In addition to the above, a taxpayer may elect to deduct certain amounts for materials and supplies at the time of payment as opposed to expensing when the materials and supplies are consumed. This allows for tax planning because the deduction can be accelerated to when the payment is made for the materials and supplies.
Your Marcum Tax Advisor will continue to keep you updated when the final regulations are issued later this year.