The IRS has issued long-awaited final regulations on the treatment of costs to acquire, produce or improve tangible property. Taxpayers will need to apply these regulations going forward to determine whether they can deduct costs as repairs and maintenance under Code Sec. 162 or must capitalize the costs and depreciate or amortize them over a period of years under Code Sec. 263.

The regulations take effect January 1, 2014. Some provisions apply only to amounts paid or incurred in tax years beginning on or after January 1, 2014.  Every business, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.

The regulations provide simplification to the extent they allow taxpayers to follow their financial accounting (“book”) policies. For example, a de minimis safe harbor is available, provided taxpayers have a written policy on their books to deduct items within the safe harbor. The safe harbor threshold is $5,000 for those with applicable financial statements (generally audited financial statements) and $500 for those without applicable financial statements.  The rules for repairs and maintenance also allow taxpayers to follow their book policies.

The following action steps need to be taken before your tax year beginning on or after  January 1, 2014 in order to use the de minimis safe harbor:

1. Establish a written accounting policy;
2. Update company accounting procedures to be in conformity with your accounting policy

A sample de minimis safe harbor capitalization policy as well as additional information outlining the significant provisions in the final regulations can be found in the resources section above.

Should you  have any questions or concerns regarding these regualtions, please contact our firm at 205-871-1880.