The Repair v Capitalization regulations released back in 2011 have been revised and re-released. The re-released regulations make up 111 pages as a pdf file. They discuss many different areas. This email text discusses the portion of these regulations that provide a safe harbor dollar amount for deducting purchases of equipment.
Previous to these regulations there was a $500 safe harbor per item amount that could be deducted for purchases of “smallwares” by restaurants, but there was not a safe harbor amount for any other business. We know many tax professionals used $500 or another amount when preparing financial statements or income tax returns. The 2011 regulations proposed a $100 amount. These new September 2013 regulations increase this amount and give us additional options if certain conditions are met.
Here are the safe harbor amounts available and their respective conditions:
** $200 – The definition of “materials and supplies” includes property that has an acquisition or production cost of $200 or less (increased from $100 or less in the 2011 regulations). This $200 is per item or invoice.
Example 6. Unit of property that costs $200 or less. F operates a business that rents out a variety of small individual items to customers (rental items). F maintains a supply of rental items on hand. In Year 1, F purchases a large quantity of rental items to use in its rental business. Assume that each rental item is a unit of property under §1.263(a)-3(e) and costs $200 or less. In Year 2, F begins using all the rental items purchased in Year 1 by providing them to customers of its rental business. F does not sell or exchange these items on established retail markets at any time after the items are used in the rental business. The amounts that F paid for the rental items in Year 1 are deductible in Year 2, the taxable year in which the rental items are first used in F's business.
Example 7. Unit of property that costs $200 or less. G provides billing services to its customers. In Year 1, G purchases 50 scanners to be used by its employees. Assume each scanner is a unit of property and costs less than $200. In Year 1, G's employees begin using 35 of the scanners, and stores the remaining 15 scanners for use in a later taxable year. The amounts G paid for 35 of the scanners are deductible in Year 1, the taxable year in which G first uses each of those scanners. The amounts that G paid for each of the remaining 15 scanners are deductible in the taxable year in which each machine is first used in G's business.
** $500 – The definition of “materials and supplies” includes property that has an acquisition or production cost of $500 or less (increased from the above $200) IF:
1) The taxpayer does not have an “applicable financial statement”,
2) The taxpayer has at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes:
-- a) Amounts paid for property costing less than a specified dollar amount [presumably this amount is $500 or a smaller number], or
-- b) Amounts paid for property with an economic useful life of 12-months or less.
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with these accounting procedures, and
4) The amount paid for the property does not exceed $500 per invoice (or per item as substantiated by the invoice).
** $5,000 – The definition of “materials and supplies” includes property that has an acquisition or production cost of $5,000 or less (increased from the above $200 or $500 amounts) IF:
1) The taxpayer HAS an “applicable financial statement”,
2) The taxpayer has at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes:
-- a) Amounts paid for property costing less than a specified dollar amount [presumably this amount is $5,000 or a smaller number], or
-- b) Amounts paid for property with an economic useful life of 12-months or less.
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with its written accounting procedures, and
4) The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice).
An “applicable financial statement” is:
1) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders),
2) A certified audited financial statement that is accompanied by the report of an independent CPA (or in the case of a foreign entity, by the report of a similarly qualified independent professionals, that is used for:
-- a) Credit purposes;
-- b) Reporting to shareholders, partners, or similar persons; or
-- c) Any other substantial non-tax purpose; or
3) A financial statement (other than a tax return) required to be provided to the federal or a statement government or any federal or state agency (other than the SEC or IRS).
** $10,000 – A “qualifying taxpayer” can treat as improvements to a building as a repair and maintenance. This treatment applies only if the amounts paid during the year for repairs, maintenance, improvements, and similar activities performed on the eligible building property does not exceed the LESSER of:
1) 2 percent of the unadjusted basis of the eligible building property, or
2) $10,000.
A “qualifying taxpayer” is one who has average gross receipts over the past three years (or annuitized amount if in existence less than three years), of $10,000,000 or less. “Gross receipts” does not include sales taxes or other similar state and local taxes if the taxes are imposed on the purchaser of the goods/services and the taxpayer merely collects them and remits them to the taxing authority.
An “eligible building property” is one which has an unadjusted basis of $1,000,000 or less.
ELECTION PROCEDURES
A taxpayer who wants to use the $200, $500, or $5,000 safe harbor amounts must attach a statement to a timely filed return (due date plus extensions). The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-1(f).
A taxpayer who wants to use the $10,000 safe harbor amount must attach a statement to a timely filed return (due date plus extensions). The statement must be titled “Section 1.263(a)-3(h) Safe Harbor Election for Small Taxpayers” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-3(h).
A taxpayer who wants to ELECT to treat building repairs and maintenance as a capital asset instead of as a deduction must attach a statement to a timely filed return (due date plus extensions). The statement must be titled “Section 1.263(a)-3(n) Election” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-3(n).
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