The IRS issued regulations in 2013 & 2014 trying to bring clarity to the many conflicting rules in the area of capitalization vs expensing of business property. These new regulations are commonly called the “tangible property and repair regulations” or TPR regulations.
The new regulations, which apply to tax years beginning in 2014, have many new provisions including new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.
One of these new safe harbors is the Building Safe Harbor for Small Taxpayers which allows the taxpayer to immediately expense costs/improvements related to real estate without having to determine if the cost should be capitalized under the new regulations.
To qualify for the safe harbor, the taxpayer has to meet a series of requirements:
- The owned or leased building must have an unadjusted basis of $1M or less (eligible building).
- The taxpayer must have average annual gross receipts of $10M or less (3 previous years) (qualifying taxpayer). See below for what qualifies under “gross receipts”.
- Total amounts for repair, maintenance and improvement expenses for the tax year must not exceed lesser of $10,000 or 2% of unadjusted basis of eligible building. Amounts deducted under the de minimis safe harbor and routine maintenance safe harbor for building must be included when computing the annual amount paid or incurred for repair, maintenance and improvement to building.
- Include annual election statement with timely filed, original return, including extensions.
The Building Safe Harbor for Small Taxpayers annual election is applied on an eligible by eligible building basis.
Gross receipts for short tax years are annualized by multiplying the gross receipts for the short period by 12 and dividing the product by the number of months in the short period. Gross receipts for making the qualifying taxpayer determination include total sales (net of returns and allowances) and all amounts received for services. Gross receipts also include income from investments and from incidental sources, such as interest, dividends, rents, royalties and annuities, regardless of whether they were derived in the ordinary course of business.
Don’t overlook this tax saving opportunity for taxpayers!
By Melinda Nelson, CPA & Michael Willett