Hartford Business Journal

10 Hartford Business Journal • March 2, 2015 www.HartfordBusiness.com experTS Corner New IRS rules tighten accounting management of business expenditures By Brenden Healy T he Internal Revenue Service has issued new "repair regulations" that are forcing most businesses with tangible property to evaluate their current accounting methods for expenses related to repairs, improvements and acquisition of tangible property. These regulations remove some gray area from the previous tax reg- ulations and create more uniformity. Businesses are faced with two ques- tions: Should it capi- talize or write-off certain expenditures that were formerly just an expense. Capitalization — simply put — is when a deduction becomes an asset and you can't immediately write it off (or expense it) for tax purposes. The requirements cover numerous categories, including asset acquisition and disposition, depreciation, "de minimis" capitalization thresholds, materials, supplies, and other costs relating to fixed assets. While the new IRS requirements mean more accounting work for businesses, the IRS will also have less opportunity to assess additional taxes if you're complying with these rules. Here's some thoughts to help you understand your exposure to additional taxes or potential tax relief. Why are the new IRS rules important? They change the way your accountant treats your expenditures at tax time. This applies to your repairs and maintenance, materials and supplies, spare parts, and acquisition costs. These new rules are com- plex and may even include traps for the unprepared business. Is your business required to comply with the regulations? Yes. Compliance with the new regulations is mandatory for tax years beginning on or after Jan. 1, 2014. Failure to comply with the new regulations can result in the assessment of additional tax, interest and penalties at both a federal and state level. What do you need to do to comply with these IRS rules? Some taxpayers should file a unique IRS tax form called "application for change in accounting method." This special tax form should be attached to your 2014 tax returns, which will report to the IRS the changes being made in order to comply with these new tax rules. Because this form can be complex, the IRS recently issued relief to small businesses (i.e. those with less than $10 million in assets or $10 million in average revenue for the past three years). Although all businesses need to comply with these new IRS rules, small employers that meet the asset or income thresholds set by the IRS may not need to file this special change in accounting method form with their 2014 taxes. What business expenditures are affected by the new regulations? The new regulations impact the manner in which your business accounts for repairs and maintenance expenditures for income tax purposes. Items that you have expensed in the past may now be required to be capital- ized or written off. Under prior rules, regular and normal repair and maintenance expenses were generally deducted in the year of the expenditure. They included minor repairs and regularly scheduled maintenance that didn't materially add to the value of the property, didn't materially prolong the life of an asset, and didn't adapt the property to a new or different use. The new regulations, in general, stipu- late that amounts paid to acquire, produce or improve tangible property have to be cap- italized. However, there are several excep- tions to the rules, including the de minimis safe harbor and routine maintenance safe- harbor exceptions. One important IRS change allows taxpay- ers to deduct capital expenditures equal to or less than either $500 or $5,000 per item — depending on whether or not the taxpayer has an Applicable Financial Statement audit ("AFS"). If the taxpayer has an AFS, they are allowed to use the $5,000 per item threshold. No AFS? Then you can use the $500 limit. For both threshold levels, taxpayers are required to have written capitalization policies in place at the beginning of the year, and the expenses can't exceed either $500 or $5,000 per item. In summary, these new regulations can be complex and require you to take action. However, not making the proper IRS changes can become expensive if the IRS sends you a tax bill with interest and penalties, too. n Brenden Healy is a tax director with Whit- tlesey & Hadley P.C. He specializes in federal and state tax strategies for business owners. Brenden Healy You can't dabble in tax. You have to live it. Tax is a specialty, and it requires a special person. That is why at Federman, Lally & Remis LLC we have a dedicated group of ten tax specialists who do only tax work. It is their calling. Our team tracks new developments, court decisions, and administrative releases. Every day. For us, it is a year-long concentration. Does that make us different? We think it makes us better. Federman, Lally & Remis – Not Your Typical Bean Counters. We think about taxes all the time – so you don't have to. 231 Farmington Avenue, Farmington, CT 06032 | 860-678-7100 | www.flrcpa.com

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