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While the IRS has reported on repairs regulations before, this is the first time they are issuing them in final form. The IRS reports that the final repair regulations will affect all taxpayers that acquire, produce, or improve tangible property. The final regulations provide a lot of technical information that taxpayers have to comprehend and incorporate into their accounting systems. While this may be tedious and feel overwhelming, the regulations do provide some positive benefits for taxpayers. The Treasury has included some of the comments they received into the final regulations in an attempt to reduce the time required to comply with the new regulations.
New safe harbor for routine maintenance for buildings
The 2011 temporary regulations provided that the costs of performing certain routine maintenance activities for property other than a building or the structural components of a building are not required to be capitalized as an improvement. Due to the comments received by Treasury, the final regulations contain a safe harbor for routine maintenance for buildings.
The final regulations use 10 years as the period of time in which a taxpayer must reasonably expect to perform the relevant activities more than once.
Routine maintenance can be performed any time during the life of the property, provided that the activities qualify as routine under the regulations.
For purposes of determining whether a taxpayer is performing routine maintenance, the final regulations remove the taxpayer’s treatment of the activity on its applicable financial statement from the factors to be considered.
The final regulations clarify the applicability of the routine maintenance safe harbor by adding three items to the list of exceptions from the routine maintenance safe harbor:
Amounts paid for a betterment to a unit of property
Amounts paid to adapt a unit of property to a new or different use
Amounts paid for repairs, maintenance, or improvement of network assets
The good news for taxpayers
The final regulations do not provide a bright line test when determining whether improvements need to be capitalized or expensed. Meaning- the IRS regulations give examples but no hard numbers. While some taxpayers like the subjective nature of the rules; many taxpayers do not want to burn up resources training their staff, or have to battle the IRS regarding expenditures that have to be capitalized upon an examination. The inclusion of a “safe harbor” for repairs and maintenance on buildings should alleviate some of these difficulties when applying the improvement standards for restorations to building structures and systems.
Many taxpayers are turning to experts in the field in an attempt to maximize their tax deductions and reduce the total burden of complying with the regulations. This is where a Cost Segregation Analysis is beneficial. Cost Segregation analyses include a thorough review of the property to accurately depreciate the assets and accelerate tax deductions. They also include an intensive review of all blueprints and site visits to verify the assets and determine the quality of those assets. The professionals performing these analyses have an intimate knowledge of the building and building systems and will provide valuable insight when examining repair and maintenance costs to determine if they must be capitalized or expensed.
CSP360 is a subsidiary of Freed Maxick, CPAs in Buffalo NY. Freed Maxick CPAs is a Top 100 accounting Firm, and one of the nation’s leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 approach of a taxpayer’s assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, 179D Energy Studies and 263a Repair and Maintenance Review. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable on IRS examinations.
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