Note: The information below was summarized from an article published by Craig Miller, President of Cost Segregation Services, Inc. in the January 2015 issue of Properties magazine.
Final IRS Repair Regulations that became effective as of January 1, 2014 will impact every commercial real estate owner and commercial tenant that has acquired, constructed, improved or disposed of tangible personal property.
When making improvements to a building or building systems, the cost typically must be capitalized and depreciated over a significant period of time (i.e., 27.5 or 39 years). However, if the cost can qualify to be expensed instead, then the owner or tenant can realize significant tax savings.
The new IRS regulations:
- Authorize the write-off of the remaining tax basis of retired or demolished building components and, if handled correctly, will enable commercial property owners to avoid a potential future recapture tax upon the sale of the property;
- Will result in most businesses having to file one or more Changes in Accounting Method for tax years beginning January 1, 2014, and result in taxpayers losing deductions of the proper forms are not filed with their 2014 tax return; and
- Provide certain tests for determining whether an expenditure is a capital improvement that must be depreciated over time and certain safe harbors that would qualified an expenditure to be treated as an ordinary deductible expense. If the expenditure would be considered a “betterment,” “adaptation” or “restoration,” as described in the regulations, then it is a capital improvement, unless the expense qualifies under one of the safe harbors. The safe harbors affect certain routine and ongoing maintenance and repairs, small taxpayers (revenues less than $10 million) and qualifying de minimis expenses.
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Craig’s article in Properties magazine provides much more detail than I can provide in a blog post, which by its nature is intended to be brief. Anyone who is or could be affected by the new IRS repair regulations should read Craig’s more detailed discussion in his article or contact him directly for information.