Contact UsI keep hearing a lot about the new IRS repair regulations released in December of 2011. Why is there so much interest in these regulations, who is affected and what do the cover?
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Patrick O'Hara , EA
The IRS Issued TD 9564 in December 2011 to deal with the historically contentious issues related to tangible property, such as the proper treatment of materials and supplies, general asset accounts, acquisitions, and proper determinations of repairs versus capital improvements.
The decision clarifies that amounts paid for "materials and supplies" are deductible in the tax year in which the materials and supplies are used or consumed by the taxpayer's operations. Incidental material and supplies may also be deducted in the year purchased, even if they are not consumed by the end of the tax year.
The decision also states that the taxpayer may elect to capitalize and depreciate any items that would otherwise not qualify as deductible until they are consumed. This includes acquisitions and capital improvements.
The decision clarifies that if the improvement results in the betterment of the property, restores the property, or adapts it to a new use, that the expense must be capitalized.
This issue affects any business that buys assets. The question that arises is if the business should deduct the expense in the year purchased or over the useful life of the asset. Most businesses can skirt this issue by using the Section 179 election. However, this issue becomes most salient with rental real estate where the section 179 election is not allowed. The classic illustration is repairing a leaky roof. Is it a repair that is expensed in the year paid? Or should it be capitalized and deducted over the useful life -- 27.5 years for residential real estate.
This treasury decision has set in motion a temporary regulation that became effective January 1, 2012 and expires on December 23, 2014.
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587 weeks ago
The decision clarifies that amounts paid for "materials and supplies" are deductible in the tax year in which the materials and supplies are used or consumed by the taxpayer's operations. Incidental material and supplies may also be deducted in the year purchased, even if they are not consumed by the end of the tax year.
The decision also states that the taxpayer may elect to capitalize and depreciate any items that would otherwise not qualify as deductible until they are consumed. This includes acquisitions and capital improvements.
The decision clarifies that if the improvement results in the betterment of the property, restores the property, or adapts it to a new use, that the expense must be capitalized.
This issue affects any business that buys assets. The question that arises is if the business should deduct the expense in the year purchased or over the useful life of the asset. Most businesses can skirt this issue by using the Section 179 election. However, this issue becomes most salient with rental real estate where the section 179 election is not allowed. The classic illustration is repairing a leaky roof. Is it a repair that is expensed in the year paid? Or should it be capitalized and deducted over the useful life -- 27.5 years for residential real estate.
This treasury decision has set in motion a temporary regulation that became effective January 1, 2012 and expires on December 23, 2014.