The Internal Revenue Code generally requires the capitalization of amounts paid to acquire, produce, or improve tangible property. On the other hand, taxpayers are allowed to deduct ordinary and necessary business expenses, including the costs of certain supplies, repairs, and maintenance. It is not always easy to distinguish between an asset that must be capitalized and depreciated over a number of years and property that is a material or supply used in a trade or business. The line between improvement and repairs or maintenance is not always clear.
Former regulations attempted to define the difference between capital and non-capital expenditures by providing that capital expenditures included amounts paid or incurred to add to the value, or substantially prolong the useful life, of property owned by the taxpayer, or adapt the property to a new or different use.
Those regulations also provided that amounts paid or incurred for incidental repairs and maintenance of property were not capital expenditures. These standards were subjective and required a fact-intensive analysis of the taxpayer’s situation. Not surprisingly, there has been considerable controversy between taxpayers and the IRS over the proper characterization of these expenses.
The unveiling of these final tangible property capitalization regulations is the culmination of a multi-year effort involving intermediate guidance and taxpayer feedback. With a number of clarifications and new safe harbors, the final regulations represent a collaborative effort between taxpayers and the IRS to bring a degree of certainty to an area of tax law traditionally fraught with controversy. The final regulations are generally effective for tax years beginning on or after January 1, 2014.
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Written by: Doug Rodrigues