Now is the time to “repair” the deduction for repairs! You’ll have a hard time believing this one, but here are the facts.
We’ve sent our business clients the following letter to help them understand the problem they face for 2012 taxes.
To all business property owners:
I am told the 2010 US Census reports 99.7% of all businesses are small businesses who provide over 64% of all new private-sector jobs and employ nearly 50% of all private sector Americans.
It appears safe to say without small business there is no United States of America.
On December 23, 2011 the IRS issued job-crushing new Regulations on small businesses. The complexity of these regulations adds layers of compliance testing cost to every single transaction for repairs,
maintenance and supplies.
These regulations will result in small businesses being forced to depreciate rather than deduct nearly every expense over $100 resulting in deductions being over 3, 5, 7 and
even 39 years instead of at the time of expenditure.
This unproductive use of company cash (including the higher taxes you will pay) will result, in many small businesses being unable to hire, expand or advertise in a time when America needs every job all businesses can provide.
These rules will effectively result in every expense you incur for supplies, repairs or maintenance of less than $100 or is for “ordinary” maintenance (an expense that is paid more than once over the items lifetime)
being deducted in the year paid. All other expenses must be individually examined (over a dozen tests) to determine if it is a betterment, a restoration or an adaptation of an item for a different use, AND then,
depreciated over many years – unless they meet a second, third and even fourth layer of write-off rules.
Big businesses with audited financial statements are allowed to simply write off up to 1/10 of 1% of sales (a much higher amount) than small businesses.
You be the judge if this an IRS slap in the face of small business, or just ignorance or disdain for small businesses.
In any event, it isn’t good. Here is a prime example: if you spend $110 for a new USB flash drive you will now be forced to deprciate it over 5 years! Incredible as this sounds, it gets worse.
Unless you spend tens of thousands of dollars having an engineering cost segregation study performed on your business office building.. every major expenditure made on the building must be
depreciated over the life of the building.
In order to get a current deduction, you must estimate how much of the original purchase price should have been allocated to that repaired or replaced component
and write off that estimated amount.
Here is another example: say you spend $7,500 replacing an air conditioner in your office building. The old rules would require depreciation of the unit over 7 years,
or, in limited cases, allow a current deduction of the full amount.
Under the new rules, the air conditioner will be depreciated over 39 years, you must somehow estimate what portion of the building’s original cost should have been allocated to the original air conditioner,
and write off that amount as if it were abandoned.
These rules went into effect on January 1, 2012 and could add hours to the preparation of every business tax return.
They are particularly harsh for “unaudited” small businesses without a fixed asset department to examine every expense, an expensive cost segregation study or the allowable percent
of sales write offs allowed for big businesses
These new rules do not seem to be politically motivated and can be traced back to 2006 when the IRS first proposed them. These new regulations overturn 40 years of judicial guidance in these areas and
will be costly and devastating to small business in particular.
Contact your representatives in Congress to stop the obvious small business bias of the IRS and to force them to use common sense and recognition of the unique aspects of small business by withdrawing these new rules.
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