Responding to concerns voiced by NAHB members and other groups representing taxpayers, the Treasury Department and the Internal Revenue Service (IRS) have made a taxpayer-friendly change to tax regulations regarding repair and improvement expenses that took effect in 2014.
In general, the new rules require business taxpayers to capitalize, rather than expense or deduct, expenditures used for certain repair or maintenance projects.
Under the first edition of the repair rules, a taxpayer without an applicable financial statement could elect to expense purchases that cost up to $500 on a per-item basis. A separate $5,000 safe harbor was established for taxpayers with applicable financial statements. These safe harbors were created as a taxpayer simplification measure to reduce administrative costs.
Many organizations, including NAHB, provided examples to the IRS indicating that the $500 limit for taxpayers without financial statements was too low given typical costs of computers, machinery or equipment and parts.
In response to these concerns, Treasury and IRS have increased the $500 limit to a $2,500 per item safe harbor for costs incurred after Jan.1, 2016. This is a favorable change for the construction and real estate sectors, which possess a larger concentration of small businesses.
Here’s an example: Suppose a business taxpayer makes a significant repair to the HVAC system of a small apartment building that involves the purchase of a part that costs $2,000.
Assuming that the repair would otherwise require capitalization because the repair is significant and critical to the operation of the system, under the new increase in the safe harbor amount ($2,500), that cost may now be deducted immediately by the taxpayer without financial statements.
Be sure to consult your tax professional regarding this change and the new repair and maintenance rules in general.