The IRS's New Repair Regulations: Part 2

Anyone who owns a building or business equipment knows that occasionally it is necessary to have some work done to keep it in good condition.  In the last post, we discussed the IRS's new repair regulations and how the IRS is attempted to clarify when a business owner or investor is able to expense a repair and when you are required to capitalize an improvement.  I also explained why many taxpayers would prefer to have the work done classified as a repair.

There are 3 safe harbors listed in the Internal Revenue Code's Regulations that allow a taxpayer to treat the expenditure as a repair.  In this post, we will discuss the first of these, the de minimis safe harbor.

Taxpayers that have a procedure in place to claim property as an expense on its books and records may be entitled to expense either $500 or $5,000 per item depending on whether the company has an applicable financial statement.

What is an "applicable financial statement"?

According to the Internal Revenue Code's Regulation, an applicable financial statement is:

• A financial statement required to be filed with the Securities and Exchange Commission;
• A certified audited financial statement that is accompanied by the report of an independent certified public accountant; or
• A financial statement required to be provided to the federal or a state government or any federal or state agency.

What does the Internal Revenue Code mean by a procedure in place to claim property as an expense on its books or records?

At the beginning of the taxable year, a taxpayer must have a written accounting procedure in place specifying how certain expenditures will be treated.  Essentially, the procedure must specify that expenditures for less than a specified amount or that have an economic useful life of less than 12 months will be treated as an expense on the taxpayer's books.  However, the decision to implement this procedure must be made for non-tax reasons.  In other words, there has to be a rationale for this procedure other than classifying the expenditure as a repair for taxes.

When can taxpayers expense $5,000 per item as a repair?

A taxpayer may expense up to $5,000 per item if:

1. The taxpayer has an applicable financial statement;
2. The taxpayer has at the beginning of the taxable year a written accounting procedure treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount or with an economic useful life of 12 months or less;
3. The taxpayer treats the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures; and
4. The amount paid for the property does not exceed $5,000 per item.

When can taxpayers expense $500 per items as a repair?

A taxpayer may expense up to $500 per item if:

1. The taxpayer does not have an applicable financial statement;
2. The taxpayer has at the beginning of the taxable year a written accounting procedure treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount or with an economic useful life of 12 months or less;
3. The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures; and
4. The amount paid for the property does not exceed $500 per item.

What counts as part of the cost of each item?

Taxpayers electing to apply the de minimis safe harbor must include as part of the cost per item all the additional costs (delivery fees, installation fees, etc.) if these additional costs are included on the same invoice as the tangible property.  However, if they are not included on the same invoice as the tangible property they are not required to be included as part of the cost of the item.

How does a taxpayer claim the protection of the de minimis safe harbor?

If a taxpayer wishes to take advantage of the de minimis safe harbor, they must be aware that it is not selectively applied but instead applies to all amounts paid during the taxable year for applicable property.

Taxpayers must file an election with the IRS by attaching a statement to their timely filed original federal tax return, including extensions, for the taxable year the safe harbor is being claimed.  The statement must include:

• The title "Sec. 1.263(a)-1(f) de minimis safe harbor election";
• The taxpayer's name;
• The taxpayer's address;
• The taxpayer's ID number;
• A statement that the taxpayer is making the de minimis safe harbor election under Section 1.263(a)-1(f).

If you have any questions about the de minimis safe harbor election or about the IRS's new repair regulations in general, please send me an e-mail.