Your Action Needed: Repair Regulations Impact Most Businesses
On September 13, 2013, final IRS regulations were released regarding tangible property. These regulations will affect any business that purchases items of tangible property and includes guidance relating to all aspects of an asset's life cycle. The most significant changes relate to capitalization policies and the tests that now determine if the expenditure has to be capitalized, or if it can be treated as a deductible repair.
We believe these regulations, although they provide additional compliance burdens, also present great opportunities to increase repair and maintenance deductions, and the majority of taxpayers will see increased deductions with the adoption of these regulations.
It is our responsibility to inform you of these new regulations, how you must comply and the benefits of complying early.
Who Is Impacted by Repair Regulations?
The regulations will impact most taxpayers who have operating businesses (partnerships or corporations) or own real estate. This includes individual clients that file a Schedule C, E or F with their tax returns.
What Does This Mean to You?
The regulations are effective for tax years beginning on or after January 1, 2014, which means you will need to adopt the new rules during the 2014 tax season. You will need to file a Form 3115 (Application for Change in Accounting Method).
The IRS is giving you a chance to file Form 3115 using the "automatic consent procedure" for a limited time. If you wait until the 2015 tax year, and depending on your particular situation, filing the Form 3115 may require the more onerous manual consent procedures, which includes a $7,000 fee to the IRS.
What If You Don't Comply?
We have been asked many times "what if I don't comply with these regulations?" If you are not in compliance with these new rules, you may encounter some of these issues:
- Repairs that are deductible under the new regulations may have to be capitalized.
- A permanent loss of depreciation, if a disposal has not been accounted for properly.
- Future increased costs of filing a Form 3115 once outside the window provided.
- A potential increase in audit risk because the IRS is expecting most business-related tax returns will include a Form 3115.
- Giving the IRS the ability to potentially dictate whether an item is a deductible repair or an item that has to be capitalized if the change of accounting method is not adopted in a timely manner.
Where Can I Get More Information?
We've created a webpage that offers information about the Repair Regulations and how they impact your business, including an easy-to-read infographic, an educational video and Frequently Asked Questions.
Please contact your Eide Bailly professional with questions or for additional information.
