Pub. 4 2013 Issue 4

www.wvbankers.org 8 West Virginia Banker C urrent guidance On Sept. 19, 2013, the IRS published final and proposed regulations govern- ing the tax treatment of (1) materials and supplies, (2) costs incurred to acquire or produce tangible property, (3) repairs ver- sus improvements to tangible property and (4) dispositions of Modified Accelerated Cost Recovery System (MACRS) property. The regulations are effective for taxable years beginning on or after Jan. 1, 2014 (or costs paid or incurred in such taxable years where applicable). While the final regulations are generally effective for taxable years beginning on or after Jan. 1, 2014, many taxpayers see advantages to “early adoption” of select provisions, which is a favorable implemen- tation approach encouraged by the IRS. Additionally, in order to use a special de minimis safe harbor for certain costs, tax- payers will need to ensure a written capi- talization policy is in effect prior to Jan. 1, 2014. The final and proposed regulations contain several significant concepts. Materials and supplies The definition of materials and supplies and available methods and elections has been clarified and expanded. Materials and supplies now include items costing $200 or less, as well as standby emergency spare parts. Additionally, different options for accounting for rotable and temporary spare parts and/or standby emergency spare parts are available. De minimis safe harbors The final regulations provide general rules regarding capital expenditures. Under the final regulations, taxpayers have the ability to annually elect to apply a de minimis safe harbor, provided certain conditions are met. Under the safe harbor, a taxpayer may deduct amounts paid for property costing up to $5,000 (on a per invoice or item basis), provided the taxpayer has an applicable financial statement, has written accounting procedures as of the begin- ning of the tax year, and treats such items as an expense in its applicable financial statement in accordance with its written procedures. For taxpayers without an ap- plicable financial statement, such taxpay- ers may elect the safe harbor for amounts paid for items costing up to $500, provided the other requirements of the safe harbor are met (i.e., taxpayer has accounting procedures in place as of the beginning of the year and expenses such items for books and records in accordance with its procedures). Improvement of tangible property The improvement versus repair determina- tion hinges on the specific unit of property (UOP) being worked on. In the case of a building, while the UOP is defined as the building and its structural compo- nents, the improvement standards must be applied separately to each of the following building systems: • Heating, ventilation and air condi- tioning • Plumbing and electrical • All escalators and elevators • Fire protection and alarms • Security • Gas distribution • Any other systems that may be iden- tified in published guidance The final regulations identify betterments, restorations and adaptations as the catego- ries of costs generally considered to result in capitalizable improvements to a UOP. The regulations also provide a safe harbor for routine maintenance activities that are expected to be performed more than once during a specified period. The final regulations further provide for a small taxpayer safe harbor that allows qualifying taxpayers to elect not to apply the improvement rules to costs paid or in- curred as part of trade or business activity with respect to eligible small buildings. Final Regs Governing Tangible Assets Capitalization and Repairs Effective January 1, 2014 By Harry “Skip” Harless and Kevin Highlander