The New IRS Rules on Expensing

Reap significant tax savings with new tangible-property regulations.

By Mary Ramm

Tax season is upon us, and this year, savvy taxpayers can realize significant tax savings through new tangible-property regulations that went into effect for tax years beginning on or after Jan. 1, 2014.

These regulations will affect all taxpayers who incur repair and maintenance costs or who have capital expenditures. If you’re a residential real estate investor, there’s an excellent chance this applies to you.

The regulations will determine whether an expenditure on a rental unit was an expense that can be immediately deducted … or if that work was a capital improvement that can be depreciated over the course of several years.

This can be a complicated topic, and it’s one that you should probably address with your accountant. But change and opportunity go hand-in-hand. By being proactive, you can capitalize on the new regulations and reap major benefits.

It’s important to have this conversation with your accountant now. Many of the opportunities are one-time options only, which require you to act in time for this year’s filing season. If you possess tangible property, additional compliance will be necessary to apply these regulations. You should expect to fill out added forms and elections even if you wish to continue treating your property as you have previously.

By addressing these regulations now, you will avoid additional costs in the future. For example, you may need to file a Form 3115 to change your accounting method. The IRS is waiving its Form 3115 fee, which can run hundreds of dollars, but only if you file the form this year.

What Are the Benefits?

Now, let’s take a closer look at a sample of tax benefits available to those of you who have capital expenditures, incur material and supply costs, or incur and repair maintenance costs:

•De minimis capitalization policy and election // The new regulations create a “de minimis” safe harbor provision that could allow you to write off smaller expenditures that you would otherwise have to capitalize.

These expensing provisions allow you to expense up to $5,000 per item per invoice for those with audited financial statements, or $500 per item per invoice for those without audited financial statements.

•Deduction of prior capitalized repair and maintenance costs // Along with this year’s changes, the definition of deductible repairs has become broader, allowing multiple types of expenditures that previously needed to be capitalized to now fit the new definition of deductible repairs. With proper planning, this allows you to be eligible for an immediate write-off.

•Routine maintenance // Routine maintenance expenditures may also be eligible for immediate write-off. If you perform similar expenditures on a routine basis more than once over the expected life of a unit of property, you could benefit in 2014 and on future tax returns.

•Partial asset dispositions and removal costs // If you have replaced a piece of your property, whether in 2014 or an earlier year, current mechanisms under the regulations now permit you to write off the remaining basis in and the costs to remove the replaced property.

Let’s say you replaced the roof on one of your rental properties. You can now deduct the remaining value of the old roof instead of continuing to depreciate it over the next several years.

Several of the opportunities listed here apply to both current and prior year expenditures, giving you the opportunity to consider numerous and substantial tax benefits depending on the size and nature of your business.

This article is compliments of Community Investor magazine.

Mary Ramm, CPA, is a partner in RubinBrown’s Tax Consulting Services Group in Kansas City.