Putting It All Together

TD 9636 has well over 100 case studies and examples included throughout the text. While the IRS won’t ‘draw a line in the sand’, they do give some pretty concrete samples of differing scenarios. Reg. Section 1.263(a) also has numerous examples for you to use when deciding how to best serve your client.

To summarize everything and put it all together, the following are the items that apply to all of the safe harbors we have discussed:

1. The company must have a written policy, in place before the beginning of the tax year in question, setting the non-tax related reasons for the use of the safe harbor. Read More

Improvements and B.A.R.

Betterment: Improves a material condition or defect if the defect existed prior to acquisition or during production of the UOP, even if the taxpayer was aware of the defect. Or is a material addition such as an enlargement, expansion or extension of the UOP. Or is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of the UOP.

Adaptation: Amounts paid to adapt or change the use of the UOP from its original use when placed in service.

Restorations: Amounts paid to bring the UOP back to regular efficient operating condition Read More

Improvements vs. Repairs

The bulk of the new rules focus on changes in the Improvements vs Repair rules. Let’s review the “way it’s always been” so we have a basis for the changes. (§1.263(a)-3)

The general concept has always been if it’s an improvement (remember B.A.R.) it must be capitalized. The rules all go back to the definition of a UOP above. If an improvement is capitalized it may not be treated as its own UOP but must be treated as a part of the UOP it is improving. This is where we utilize the “component of” choice in selecting methods/class life of depreciable items.

Real property has some specific rules that do not apply to other tangible property. A Read More

TD 9636 The New Rules

The Final Regulation released on 9/19/2013 made some substantial changes to the Repairs vs Capitalization rules. Surprisingly, most of them are in the small business taxpayers favor.

De Minimis Safe Harbor is a election made up to a specific dollar amount allowed to be expensed when it would normally be required to be capitalized. For the purpose of this discussion the election must be made on the timely filed original return(including extension), the election must be in a written internal policy for a non-tax reason and the policy must be made prior to the beginning of the tax year. The election (or failure to make Read More

We are going to review and discuss the new IRS Final Regulations for Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property (TD 9636). Let’s start with some history and definitions.

Prior to 2006, the IRS Regulations surrounding the treatment of business expenses for tangible property as either Repairs/Materials/Supplies to be expensed in the year of purchase or as capital items that fall under the UNICAP rules were brief, vague and often contradictory. (§263(a) and §162(a)) In 2006, new proposed regulations were issued for comments and concerns. (Prop. Reg. §1.168(i)-1 thru 8) In 2008, new proposed regulations were issued after taking these concerns into account and in 2011, after another round of fine-tuning, the temporary regulations were issued. Finally, in September Read More