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.
2. The expense must be able to be substantiated.
3. The UOP must each, individually, be able to be identified, basis/cost determined, and classified as to repair, material, useful class life and useful economic life.
4. The expense must be able to be defined as consumable, inventory, supplies or materiel.

Once these things are determined you need to look at the various safe harbors that are available. Let’s look from easiest to qualify for to the hardest.

De minimis Safe harbor:

1. Invoice item amounts cost is under the applicable amount of $500/$5000 each? Yes or no?
2. If yes, use election §1.263(a)-1(f) to deduct all items that qualify under this election or none of them. Attach a statement to the return.
3. If no, go to the next safe harbor.

Small taxpayers safe harbor:

1. Is the expense for a repair on real property or a component of real property? Yes or no?
2. If yes, does it meet the lesser of 2% of unadjusted basis or $10K limitation? Yes or no?
3. If #1 is no, analyze under the next safe harbor.
4. If #2 is yes, use the election §1.263(a)-3(h) to deduct all qualifying expenses or none of them. Attach a statement to the return.
5. If #3 is no, analyze under the next safe harbor.

Routine maintenance safe harbor:

1. Does the property/expense meet the expectation to have this type of work done at least twice in ten years or its class life? Yes or no?
2. If yes, deduct the expense.
3. If no, or it qualifies as an improvement under B.A.R., capitalize the expense.
4. If the expense does not qualify as an improvement under B.A.R. Analysis, then deduct it under this safe harbor.
5. Remember, this safe harbor is not an election and requires a Form 3115 to be filed, unlike the other two safe harbors.

It’s obviously not possible to cover everything in the new regulations in this session, so we have hit the high points. There are some other areas that I urge you to do further research on including partial dispositions, specifics of the needs to file or not the Form 3115, cost segregation, and taxpayers who need to file AFS.

In accordance with Circular 230 Disclosure