Just when we thought that taxes couldn’t get any more complicated, IRS comes out with new rules for business depreciation that are going to add extra time and cost to every one of our business clients. Although we saw this coming and posted this warning in 2013, our hope for IRS reconsideration did not occur.
We now have a dual standard – one that imposes more onerous and costly requirements on small business than those allowed for larger companies with “Qualified Financial Statements”.
Many nuances apply to these new small-business-unfriendly regulations, and we are happy to discuss them (your office or ours) to help keep your costs of IRS compliance down.
Remember that you don’t have to fight this IRS battle alone. You can click the link below to contact us with questions after you’ve read this post.
On September 19, 2013, the Internal Revenue Service issued final regulations which went into effect for tax years beginning on or after January 1, 2014. These incredibly bizarre regulations require you to keep more detailed explanations for repairs, maintenance and supplies; provide more narrow definitions of what are considered deductible expenses; and generally require specific analysis of individual items so they are classified appropriately. We will be required to spend substantial additional professional time, with substantial additional fees, to analyze all items unless you confirm you’ve taken action to comply with these new rules.
Materials and Supplies:
You are allowed to expense any supply item individually costing $200 or less, including fuel, lubricants or similar items that will be used in 12 months or less. We suggest you add a new expense account titled “Materials and Supplies < $200” to be used exclusively for these expenses. Anything not allowed under these rules will require individual analysis to determine if they are qualified deductible expenses or must be depreciated over several years. Special rules apply for spare parts inventories.
Equipment, Repairs and Maintenance:
You are allowed to expense any item of equipment or an equipment repair or maintenance costing $500 or less. (For buildings, a different rule applies.) We also suggest entering individual items costing no more than $500 into a new account called “Small Equipment Purchases <$500.” Anything not allowed under these rules will require individual analysis to determine if they are qualified deductible expenses or must be depreciated over several years.
Building Repairs & Maintenance:
If your building has a cost of $1,000,000 or less, any repairs expected to be made more than once in ten years may be expensed when paid. Repairs not expected to be made more than once in ten years must be aggregated and, if the total amount expended in one year does not exceed the lesser of $10,000 or 2% of the cost basis in the building, they can be deducted.
If you don’t qualify under this rule, EVERY individual amount expended during the year must be reviewed to determine if it can be expensed or must be depreciated.
Expenses Above the Limits:
IRS requires examination of EVERY item outside of the above limits to determine if it is “betterment,” a “restoration” or an “adaptation” of the main unit of property. (A unit of property is the inter-related parts composing one larger unit – like a car which is composed of inter-related parts and systems. A repair to any component of the car must be examined as to whether it is a betterment, restoration or adaptation of the car as a whole. For buildings, you first look at the building as a whole and then also at its components.)
The old rules the required new assets acquired or produced to be capitalized are still in effect. New assets with a cost of more than $500 must be capitalized.
A betterment is fixing a condition that existed at purchase, or an increase in physical size or capacity of an asset and must be capitalized and depreciated. A restoration is generally a cost to return an asset that has deteriorated to a non-functional state to its useful condition, or rebuilding an asset after the end of its depreciable life or replacing a major component of the property, and must be capitalized and depreciated.
Finally, an adaptation cost is one incurred to change the function of a piece of equipment or property to a different use and must also be capitalized and depreciated.
Although this sounds extensive, believe it or not, it is only a “tip of the iceberg” summary. And, as is usually the case with all tax law changes, a very few (despite the IRS’ best efforts) may actually find some benefit from these changes.
We stand ready to help you and your business survive this regulatory onslaught. Contact us and let our expertise work
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