IRS issues final ‘expense vs. capitalization’ regs

BVWireIssue #132-3
September 25, 2013

The Internal Revenue Service has issued final regulations (T.D. 9636) on deduction and capitalization of expenditures related to tangible property. The final regulations include rules for determining whether costs related to tangible property are deductible repairs or capital improvements.

Changes made: The final regulations adopt the temporary regulations issued in 2011 (T.D. 9564), with a number of changes. One such change is in response to comments that the $100 threshold for property that is exempt from capitalization was too low. The final rules raise it to $200 and retain the rule that the amount can be increased in IRS guidance. Another change—a significant one for small companies—is that taxpayers with gross receipts of $10 million or less can elect to deduct (for buildings that initially cost $1 million or less) the lesser of $10,000 or 2% of the adjusted basis of the property for repairs each year.

The final regulations, which will be published in the Federal Register on September 19 and apply to tax years beginning on or after Jan. 1, 2014, do not finalize or remove the temporary regulations governing dispositions of property under Sec. 168. Instead, to address significant changes in this area, revised proposed regulations were issued at the same time as the final regulations. Comments on the proposed regulations are requested within 60 days of their publication in the Federal Register (scheduled for September 19), and a public hearing has been scheduled for December 19.

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