Understanding Repair Regulations for Taxpayers

The repair regulations or more aptly the Tangible property repair regulations were issued by the U.S State Department of the Treasury on the 13th of September 2013. This piece of legislation relates to the deduction and capitalization of expenditures related to tangible property. The effect of the 13th September legislation has been to Expand and clarify the existing regulations while removing and replacing the temporary provisions as contained in sections 162(a) and 263(a) among others. However some of the 2011 temporary regulations have actually remained in place such as those under section 168 which relate to general asset accounts and the disposition of property subject to section 168. This 222 paged document came into effect as of the 19th of September 2013 and are effective January 1 2014.

How Do They Function?

They regulate the instances when taxpayers are required to capitalize or deduct their expenses associated with the acquisition, maintenance, repair and replacement of tangible property. The regulations cover five broad areas which are materials and supplies, repairs and maintenance, capital expenditures, tangible property acquisition or production costs, and tangible property improvement costs.

1. Costs relating to non-incidental supplies and materials are to be deducted in the first year of consumption or use as a general rule. In this regard, materials and supplies are taken to mean tangible property regulation consumed and/or used within the business of the taxpayer other than inventory but rather is taken to mean;

• Components acquired for the maintenance, repair or improvement of a tangible property unit that is owned, serviced or leased by the taxpayer and not acquired as a component of any tangible property unit.

• Lubricants, fuel, water and other related items whose consumption is reasonable within a period of 12 months.

• A property unit that has a 12 months or less life of economic usefulness that begins when the property is consumed or used within the operations of the taxpayer.

• A property unit that has an acquisition value below $100 under the temporary regulations and double that under the final regulations.

• Rotable and temporary spare parts are deductible in the year of consumption except under situations where the taxpayer opts for a different method of accounting in which option standby emergency parts are excluded.

2. The provisions state that certain categories of maintenance costs do not need to be capitalized. Relating to the routine maintenance safe harbor, only amounts for recurring activities that are necessary in the preservation of the operating efficiency of the property can be deductible.

3. Taxpayers who treat repair and maintenance costs as capital expenditures in their books are allowed to make annual decisions of opting out of expensing the costs. Once the taxpayer makes the election, there is no allowance for revocation. This election can be made through the attachment of a statement to the original tax return which must be filed on time.

Understanding Repair Regulations for Taxpayers may prove rather complex for people who are not in the accounting profession which is why most businesses have elected to rope in professional tax companies in tackling repair regulations for 2014.

• It is the sole responsibility of the taxpayer to ensure compliance with the regulations and adhering to taxable year’s regulations starting on or after the 1st of January 2014.

There are a lot of hidden benefits as well for the taxpayer for example: You can segregate the cost of the structural components of a building that was disposed in recent years. You can also make an exercise to identify expenditures in recent years that do not qualify as improvements to building systems or buildings to expense them as repairs.