If you own, lease, inhabit or are otherwise involved in any business real estate with depreciable property then you will probably be affected by the new repair regulations put in place by the IRS this year. The regulations involve the treatment of expenditures incurred in acquiring, producing, selling, or improving and repairing tangible assets and are effective for tax years beginning on or after January 1, 2012. These new regulations present taxpayers with both opportunities for tax deductions and compliance issues related to conforming to these new rules.
The new regulations released guidance on the definition of unit of property as it relates to buildings and their structural components. Prior to these new repair regulations, buildings and their structural components were categorized as a single unit of property, however, with this new guidance, taxpayers may now elect to treat certain structural components as a separate unit of property. The advantage of this election coincides with the Treasury’s expanded definition of disposals to now include retirements of structural components of a building. Previously, under the old IRS rules, taxpayers were not allowed to claim a loss on disposal for partial disposition of buildings and their structural components, but with these new regulations, taxpayers may now claim a loss on the partial disposition of a building and its structural components. For instance, if you replace the roof of a rental property then you may be able to “dispose” of the old roof by allocating a certain percentage of the property’s original basis to the roof. You could then take a loss on the disposal of that portion of the property. In addition, effective January 1, 2012, taxpayers can take advantage of recognizing a loss on disposal in the current tax year related to a prior year partial disposition.
As part of these new regulations, the IRS changed the manner and timing of how materials and supplies may be deducted. The IRS established a new de minimus rule for a company’s capitalization policy that allows eligible companies to establish a threshold amount below which any materials and supplies may be expensed. In addition, a qualified taxpayer may elect to deduct certain amounts for materials and supplies at time of payment as opposed to deducting when the materials and supplies are consumed. This represents an opportunity to accelerate those deductions from income.
In order to take advantage of these new rules, taxpayers will have to comply with the additional filing requirements as set forth by the IRS. The IRS is allowing taxpayers the opportunity to recognize these losses only if they file for a change in accounting method using form 3115. Taxpayers may elect to adopt to these new regulations in 2012 or 2013 although we anticipate that most will find it beneficial to go ahead and adopt to these regulations in the current year. This is an important compliance element related to these new rules.
We will be reviewing client records in the near future to determine which businesses may benefit from these new regulations. We will then reach out to those clients who may be affected by these changes. For assistance in determining how these new regulations affect your business, please contact our offices at 919-571-7055 or Geri Lail at geri.lail@tjtpa.com.