Capital Expenditure or Deductible Expense
Internal Revenue Bulletin 2013-43 dated 10-21-13 T.D. 9636
After seven years of drafts and proposed regulations, IRS has recently issued final regulations on deduction vs capital expenditure. They are effective January 1, 2014.
Here is a summary of the major provisions of the legislation:
Supplies consumable within a year are deducted when purchased. Those with a longer life are deducted when used or consumed. A special rule which requires an annual election with your timely filed (including extensions) business tax return allows deduction of supplies of $500 or less on an invoice or $500 per item substantiated on an invoice.
Equipment and real estate purchases and improvements are capitalized.
Routine maintenance is deductible. Routine maintenance includes recurring expenditures to keep a unit of property in working order. These expenditures are expected to be incurred more than once in the lifetime of the property. Building routine maintenance is expected to occur more than once over a ten year period.
A special rule relates to buildings, owned and leased. An annual election with your timely filed (including extensions) tax return allows a small taxpayer to annually deduct the lesser of 2 percent of the cost of the building or $10,000 of building repairs, improvements. When building expenditures exceed $10,000, they are all capitalized. A small taxpayer for this purpose is one whose building cost less than $1 million and whose average annual gross receipts are less than $10 million. In the case of a lessee, the cost of the building is the total rent paid or expected to be paid over the lease term, including renewal periods.
This legislation could have significant implications for your business. Please contact us with any questions or comments. Read the full text – Google T.D. 9636.