ACC 524/624
Project 1: Tax Research
Due Date: February 24, 2015
Points possible: 50
The IRS has issued final regulations governing when taxpayers must capitalize and when they can deduct expenses for acquiring, maintaining, repairing and replacing tangible property.
Required: Answer/explain the following areas found in the final regulations.
1. How are “materials and supplies” defined?
2. Explain “routine maintenance” safe harbor.
3. Can a taxpayer opt out of expensing repair and maintenance costs? What is required? Explain.
4. Explain the “de minimis safe harbor to acquire or produce” rule.
Clearly identify the question being asked in your response. Cite your authority.
1. How are “materials and supplies” defined?
RIA Reg. §1.162-3(c)(1) Materials and supplies.
Materials and supplies means tangible property that is used or consumed in the taxpayer's operations that is not inventory and that—
(i) Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property;
(ii) Consists of fuel, lubricants, water, and similar items, reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer's operations;
(iii) Is a unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer's operations;
(iv) Is a unit of property that has an acquisition cost or production cost of $200 or less; or (v) Is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin.
2. Explain “routine maintenance” safe harbor “An activity isn’t considered an improvement if the taxpayer expected to perform it as a result of its use of the property or to keep the property in its ordinarily efficient operating condition. The activity is considered routine if, at the time the property was placed in service, the taxpayer reasonably expected to perform the activity more than once during the property’s life.”
Routine maintenance consists of recurring work a building owner does to keep an entire building, or each system in a building, in ordinarily efficient operating condition. It includes two activities: inspection, cleaning, and testing of the building structure and/or each building system, and replacement of damaged or worn parts with comparable and commercially available replacement parts.
RIA Reg. §1.263(a)-3(i)1(i)
Routine maintenance can be performed and deducted under the safe harbor any time during the property’s useful life, including after it has been fully depreciated. However, building maintenance qualifies for the routine maintenance safe harbor only if, when you placed the building or building system into service, you reasonably expected to perform such maintenance more than once every ten years.
RIA Reg. §1.263(a)-3(i)1(i)
The routine maintenance safe harbor can be used for maintenance for property other than buildings and building components. In this event, the safe harbor applies only if, when you placed the property into service, you reasonably expected to have to perform the maintenance more than once during the property’s class life.
RIA Reg. §1.263(a)-3(i)1(ii)
Routine Maintenance Safe Harbor Under New IRS Repair Regulations
BY Stephen Fishman, J.D.
3. Can a taxpayer opt out of expensing repair and maintenance costs? What is required?
“The final regulations allow taxpayers to make an annual election to opt out of expensing repair and maintenance costs if the taxpayer treats the costs as capital expenditures on its books and records.”
In general. A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the
