On September 13, 2013, the IRS released regulations addressing the treatment of repair and maintenance expenses for federal income tax purposes. A portion of the regulations were released in final form and a portion were proposed. The regulations issued last year were ambiguous and complex to say the least. Since their release, the IRS has issued several revenue procedures in 2014 in an attempt to clarify their positions and provide guidance on how to implement them. As a result of the revenue procedures, taxpayers and practitioners finally have a better understanding of the new requirements.
As a result of the new regulations, items that you expensed in the past may now require capitalization and vice versa. While they are generally called the “repair regulations”, they also affect how taxpayers treat materials and supplies, spare parts and acquisition costs. They will affect all businesses with tangible property. Compliance with the new regulations is mandatory for tax years beginning on or after January 1, 2014. Failure to comply may result in the assessment of additional tax, interest and penalties.
The IRS has indicated that they anticipate most business taxpayers will need to file multiple Forms 3115 (Change in Accounting Method) to comply with the regulations. Completing these filings will generally require at least some analysis of depreciation schedules, the review of multiple years of expenditures for repairs and maintenance, and the analysis of accounting for materials and supplies and spare parts to determine what accounting methods must be changed and the resulting tax impact of those changes.
In addition to the requirement to file Forms 3115, many taxpayers will also need to update their internal accounting policies and may also need to attach certain elections to their tax returns.
While most changes resulting from the new regulations will not be favorable, there may be opportunities to implement changes that will benefit certain taxpayers. For instance, significant building components that have been replaced in prior years that were previously required to remain capitalized and depreciated may now be eligible for write-off in 2014.
The new rules are extremely complex and will likely increase the annual reporting burden for most business taxpayers. Now is the time to start developing a plan to address the impact of the new regulations on your business. Your ATKG tax advisor is ready to meet and discuss this with you.by