Understand Tangible Property Regulations Before Picking Up A Hammer

Do you plan to acquire, produce or improve tangible property this year? Before you do, make sure you understand the new IRS guidelines that you’ve got to follow.

The IRS issued final regulations under the Internal Revenue Code Sections 162(a) and 263(a). The new regulations simplify some of the rules from 2011’s temporary guidelines.

The new regulations provide a general framework for distinguishing capital expenditures from supplies, repairs and maintenance. They also create new safe harbors, and enhance the criteria for defining betterments and repairs to tangible property.

You must follow these revised regulations starting in tax years beginning on or after Jan. 1, 2014. The 2011 temporary regulations may be followed retroactively back to the start of 2012.

Key Highlights of Final Regulations On Capitalization of Tangible Property

  • If you have an applicable financial statement (AFS), you can now rely on the de minimis safe harbor if the amount you paid for the property doesn’t exceed $5,000 per invoice or per item. You can also rely on the safe harbor as it relates to financial accounting procedures where expense amounts paid for property with a useful life of 12 months or less if the amount per invoice or per item doesn’t exceed $5,000.
  • For gross receipts equaling $10 million or less, you can elect not to apply the improvement rules to eligible building property – as long as your total costs for the year (i.e. repairs, maintenance) don’t exceed $10,000 or 2 percent of the building’s adjusted basis.

Make sure you understand these regulations before you take action. A qualified professional can help.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 1/15/2014.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.