Effective dates – The entirety of the final regulations apply to tax years beginning on or after January 1, 2014. Taxpayers may choose to apply the rules to tax years beginning on or after January 1, 2012.
General de minimis safe harbor – Under the final regulations, a de minimis safe harbor ceiling has been provided permitting the deduction of property costing less than the amounts specified below:
- For taxpayers with Applicable Financial Statements (audited GAAP financial statements that are filed with the SEC, or other government agencies other than the IRS, or are used for credit or shareholder purposes), the safe harbor is $5,000, if the taxpayer has a written accounting policy for capitalization and expensing of the tangible property consistent with this amount.
- For taxpayers without Applicable Financial Statements, the safe harbor is $500 per invoice or per item, if accounting procedures are in place for expensing or capitalization of the property consistent with this amount.
For both taxpayers 1 & 2, this safe harbor is an elective safe harbor, requiring an annual written election to be made with the original timely filed federal tax return.
Capitalization of buildings – In general, improvements to a building or any of its component systems (e.g., HVAC, plumbing, or electrical systems) must be capitalized. A qualifying small taxpayer may elect not to apply capitalization rules when:
- Building properties are held by taxpayers with $10 million or less of gross receipts, and
- The total amount paid during the tax year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building, and
- The unadjusted basis of the building is $1 million or less.
Routine maintenance – The regulations provide a safe harbor for the deduction of routine maintenance. The amount paid is not capitalized as an improvement if it is for a recurring activity that must be performed more than once every 10 years to keep the unit of property in its ordinarily efficient operating condition.
Facilitative costs – The regulations require the capitalization of inherently facilitative costs that are amounts paid in the process of investigating or otherwise pursuing the acquisition of property as follows:
- Costs to transport the property
- Bidding costs, application fees, and similar expenses
- Costs to appraise or determine the property’s value
- Architectural, engineering, environmental, geological, or inspection services pertaining to a particular property
- Expenses for preparing or reviewing the property’s acquisition documents, such as bids, offers, sales agreements, or purchase contracts
- Costs to negotiate the acquisition terms or structure, including tax advice on the acquisition
- Expenses for evaluating and examining the property’s title
- Costs to obtain regulatory approval or secure permits
- Property conveyance costs, including sales and transfer taxes and title registration costs
- Finders’ fees and brokers’ commissions, including amounts contingent on the successful closing of the acquisition
- The cost of services provided by a qualified intermediary in a like-kind exchange
Investigative costs are deductible currently if they are incurred only in determining whether or not to make an acquisition, or determining which property to acquire from among the available choices.
Please contact us if you have any questions regarding these final regulations and how they might impact you and your business.