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Tax Treatment of Tangible Property Expenditures: 3 Changes Manufacturers Need to Know About

June 02, 2014

Last fall, the IRS released sweeping final regulations, learn more about the changes here.

Last fall, the IRS released sweeping final regulations on when tangible property expenses are “improvements” that must be capitalized and when they’re maintenance or repairs that can be deducted in the current tax year. Here are three changes of particular interest to manufacturers:

1. Simplified “de minimis” safe harbor. Under the final regulations, a taxpayer with an “applicable financial statement” (a certified audited financial statement or one required to be submitted to a federal or state government or agency) generally can apply the de minimis rule to deduct tangible property expenditures up to $5,000 per invoice or per item. The rule should facilitate the deduction of bulk purchases. However, note that, if the de minimis safe harbor is elected, it must be applied to all eligible materials and supplies.

2. Routine maintenance safe harbor. The final regulations provide a safe harbor from capitalization for certain routine maintenance costs related to tangible property like tools, equipment or machinery. A maintenance 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. The safe harbor could significantly expand your ability to deduct many common maintenance costs in the year they’re incurred.

3. Materials and supplies. It’s not all good news for manufacturers, at least not for those that elect to capitalize and depreciate certain materials and supplies. The final regulations restrict the availability of that election to rotable, temporary or standby emergency spare parts. The final regulations are extensive, and there are many other provisions that could affect your manufacturing business.

The final regulations generally apply to taxable years beginning on or after Jan. 1, 2014. Taxpayers have the option, however, of applying all or portions of the regulations to their taxable years beginning on or after Jan. 1, 2012, which in some cases could generate a tax refund.

The proper, and most advantageous, application of the rules will depend on each manufacturer’s individual circumstances. Please contact us for more information.

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