Generally, all ordinary and necessary business expenses paid or incurred during the year may be deducted. Conversely, amounts paid to acquire or improve tangible property must be capitalized and depreciated over multiple years.
Prior standards for determining whether an expense may be deducted as a repair or must be capitalized required a facts and circumstances test. This method was very controversial due to the subjective nature of the standards. The IRS provided many drafts over the last six years, with final regulations now complete and effective January 1, 2014.
These rules provide a framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible expenses. The legislation included the following new provisions:
- De minimis safe harbors for taxpayers with audited financial statements ($5000 per item) and those without audited financial statements ($500 per item)
- A new rule that allows for partial disposition of assets (e.g. writing off remaining basis of old roof when new roof is capitalized)
- Guidance on when to capitalize – betterment, adaption, or restoration
- A safe harbor for “qualifying small taxpayers” (those businesses with gross receipts of $10 million or less) for improvements to “eligible building property”
- A safe harbor for routine maintenance for buildings
- An increased dollar amount threshold under the de minimis safe harbor for materials and supplies (to $200 from $100)
Please contact your AGP advisor if you have any questions.