SHORT SYNOPSIS OF DEPRECIATION RULE CHANGES FOR 2014
On September 19, 2013 the Internal Revenue Service issue new final Regulations which go in to effect for tax years beginning on or after January 1, 2014. These incredibly complex Regulations require you to keep much better records for repairs, maintenance and supplies, and require you to specifically analyze each of these items costing over $500, assuming you do not receive audited financial statements. We are writing you this letter to help you understand that if you do not analyze these individual items and classify them appropriately we will be required to spend substantial additional professional time, with substantial additional fees to analyze all items. Here is a summary of the new rules and what you will need to do to comply with the IRS requirements.
Materials & Supplies
You are now allowed to write off any individual supply costing $200 or less, lasting less than 12 months, or fuel, lubricants or similar items that will be used in 12 months or less. Please add a new expense account to your accounting system titled “Materials & Supplies” and enter any expense meeting the above category in this account. Anything costing more than that will need to be individually analyzed under the rules below to determine if they are qualified expenses or treated as equipment that must be depreciated over several years. Special rules apply for extra parts (rotable parts ).
Equipment, Repairs & Maintenance
IF you have adopted the depreciation policy on the website, you are now allowed to write off any individual equipment item or equipment repair or maintenance item costing $500 or less. For buildings a different rule applies as discussed below. We also suggest entering individual items costing this amount or less into your repairs account, but refraining from adding items above that cost to this account. Items costing more than this will generally be required to be individually analyzed under the rules below to determine if they are qualified expenses or treated as equipment that must be depreciated over several years. The depreciation policy statement can be found on, www. anderson-accounting.com under the What’s New tab. The IRS states this cannot be back dated – it must be adopted before January 1, 2014.
Building Repairs & Maintenance
If your building has a cost basis of $1,000,000 or less a special rule applies. Any repairs that are expected to be made more than once in ten years, and costing less than $10,000 individually may be written off as repairs. Items that are not expected to be replaced more than once in ten years also must be examined individually under the rules below to determine if they may be treated as expenses or depreciable assets.
Expenses above the Limits
The IRS now requires you to examine each individual item outside of the above limits to determine if it has been a betterment, restoration or adaptation of the main unit of the property. A unit of property is now defined as the inter-related parts composing one larger unit. For example a unit of property is a car composed of inter-related parts, so any repair to the car must be examined as to whether they are a betterment, restoration, or adaptation of the car as a whole rather than its individual components. For buildings the test must first be applied to the building as a whole and then applied to its components of HVAC, plumbing, electrical, structure, elevators, security, fire protection or gas distribution. Anything considered a betterment cost, restoration or adaptation under these rules must be depreciated and listed as equipment, otherwise it may be expensed as repairs.
The final regulations characterize rotable, temporary or standby emergency spare parts as materials and supplies and modify the capitalization election for materials and supplies so that is only available for these rotable parts. (A rotable part would be something like a spare engine kept aside for use in a machine that has engine failure)
- The taxpayer may elect to capitalize or expense the above rotable items (only rotable items under the final regs) by merely doing so on the timely filed (plus extension) Federal return for the year the asset is placed in service.
Incidental materials and supplies for which no inventory is kept are deductible in the tax year paid. This means that items costing under $200 may be expensed.
When materials and supplies are disposed they are not treated as Section 1231 assets, rather they are treated as items of ordinary income or expense.
This is by no means a comprehensive explanation of the 222 pages of new regulations.