Will the New “Repair Regulations” Affect Your Business?

After years of work, the IRS has finally issued regulations clarifying for the business community when costs related to fixed assets must be capitalized and when they can be expensed.

To Expense or Capitalize? What’s the Difference?

Generally, the cost to acquire, produce, or improve tangible property must be capitalized and depreciated over a number of years. On the other hand, the cost of repairing and maintaining fixed assets is deductible in the year of the expense.

The difficulty has been distinguishing between the two kinds of costs. Is the expense a “repair or ordinary maintenance” that can be deducted on the current year’s tax return, or is it an “improvement” that must be capitalized and depreciated over the life of the asset?

If you buy, build, or repair business assets, you probably have questions when trying to decide whether your costs are currently deductible on your federal income tax return or whether they’re capital improvements.

Since deductions for capital improvements are typically spread over the life of an asset, the answer can be important even when accelerated depreciation methods are available.

The new “repair regulations” are the IRS’s attempt to clarify when costs may be currently deducted and when they must be capitalized. The newly issued tax rules can make the expense-or-capitalize decision easier for your company. These repair regulations provide guidelines and safe harbors to help you determine when certain purchases and expenditures are considered repairs, maintenance, improvements, materials, or supplies that can be deducted in the year of purchase.

Safe Harbors in the New Rules

Here’s an overview of safe harbor rules that may affect the way you classify expenses.

  • De minimis purchases
    In general, you can deduct the cost of tangible property purchased during a taxable year if the amount you pay for the property is less than $500 per invoice, or per item. This is an all-or-nothing rule, meaning if an asset costs more than $500, you cannot take a partial deduction.

To take the deduction, you’ll need a written accounting policy in place by the beginning of your tax year, and you’re required to file an annual statement with your federal tax return.

Note: This safe harbor does not apply to intangible assets such as computer software.

  • Repairs and maintenance
    You can expense costs for routine maintenance of buildings and other property. For buildings, “routine” means maintenance you expect to perform more than once in a ten-year period. The costs for material additions or defects or for adapting your property to a new or different use are not considered routine maintenance, and they should be capitalized.

For other assets, “routine” is defined as maintenance you expect to undertake more than once during the asset’s depreciable class life.

  • Improvements
    Generally, improvements you make to your business building are capitalized and depreciated over the life of the building. Under the new rules, if your business’s gross receipts are ten million dollars or less and the unadjusted basis of your building is one million dollars or less, you may choose to write off the cost of improvements.

You can make the election annually on a building-by-building basis for property you own or lease by filing a statement with your tax return. To qualify, the total amount you pay during the year for repairs, maintenance, and improvements cannot be greater than $10,000 or 2% of the unadjusted basis of the building, whichever is less.

Note: The total includes amounts you deduct under the “repairs and maintenance” and “de minimis” safe harbors.

  • Materials and supplies
    Incidental materials and supplies (supplies for which you do not maintain an inventory) costing less than $200 can be expensed in the year of purchase.

Note: This safe harbor does not affect prior rules for deducting materials and supplies, such as restaurant smallwares.

The repair regulations are effective for tax years beginning after 2013, so they will apply to your 2014 federal income tax return. In some cases, you can apply the new rules to prior years.

The repair regulations are more than 200 pages long. Filled with various effective dates, requirements, definitions, exceptions, and safe harbors, they are anything but concise and clear. As with any part of the tax law, these regulations contain numerous complex provisions that could result in tax savings or additional costs for your business. If your company owns or leases fixed assets, contact your Dugan & Lopatka CPA at (630) 665-4440 for assistance in applying the rules to your business.

Tips on Year End Charitable Giving

The IRS has just released its annual “Tips for Year-End Giving”.

The notice includes guidelines for deductible contributions, the special rules for contributions of clothing and household goods, some useful reminders and other information.

There’s also a section on “Special Tax-Free Charitable Distributions for Certain IRA Owners”. We covered this in last week’s Blog, which you can find at http://www.duganlopatka.com/blogs/blog/2013/12/11/tax-planning-for-ira-charitable-gifts/

The IRS also has a searchable online database that lists most eligible charitable organizations. Churches, synagogues and other religious organizations are not listed in the database but are eligible charitable organizations.   

You can find the notice at http://www.irs.gov/uac/Newsroom/IRS-Offers-Tips-for-Year-End-Giving-2013

Tax Planning for IRA Charitable Gifts

This might be last call for a popular tax savings strategy, the so-called “IRA charitable rollover”, (technically a Qualified Charitable Distribution, or “QCD”).

This provision allows those who are 70½ or older to give away as much as $100,000 a year from their individual retirement accounts directly to eligible charities, without having to include any of the transfer as part of their gross income. The transfer must be made directly from the IRA to the charity.

The IRA charitable rollover offers several significant tax advantages.

The rollover is excluded from taxable income, but counts towards an individual’s annual required minimum distribution.

And since the amount is not included in adjusted gross income (AGI), the distribution doesn’t increase so-called “back door” taxes, including the phase out of itemized deductions and personal exemptions.

The IRA charitable rollover expires at the end of this year. Whether it is extended remains to be seen.

Sen. Max Baucus, Chairman of the Senate Finance Committee, recently said recently there will be no broad “extenders bill” this year – and that each tax break will be considered on a case-by-case basis as part of overall tax reform.

A Busy Week in Washington

Congressional leaders are working on a budget deal aimed at avoiding a January 15 government shutdown. The deal might be voted on as soon as Wednesday, as the House is scheduled to leave town this Friday.

The deal could include raising airline passenger fees, overhauling federal pension programs and selling off spectrum to address the soaring demand for bandwidth.

The revenue would be in exchange for suspending some automatic spending cuts under the sequestration agreement.

The budget deal does not appear to address expiring tax provisions, including the research tax credit, bonus deprecation and the Section 179 expense deduction.

An extension of the exclusion for IRA distributions made for charitable purposes is still in limbo as well.

More on that tomorrow.

Reminders on Year-End Tax Planning

This year the maximum federal tax rate on long term gains is 23.8%. That includes the 20% capital gains tax plus the new 3.8% Medicare tax on net investment income.

The Medicare tax generally applies to married taxpayers with adjusted gross income exceeding $250,000. The tax imposed is based on the lesser of net investment income or the amount of modified adjusted gross income exceeding $250,000.

The Bush tax rates are gone – and the higher 35% and 39.6% tax rates are back.The “back door” taxes are with us again, including the phase out of itemized deductions and personal exemption allowances for higher income taxpayers.

Add it all up, and year end tax planning is more complicated than in years past. That’s especially true for investors and business owners with “flow through” companies (where the income is taxed on the owner’s individual return).

There’s still time to review your 2013 tax situation to minimize your taxes and avoid surprises next April.

But time’s running short.

Year-end Tax Planning for Business

Is this last call for some popular business tax incentives?

The 2012 Taxpayer Relief Act extended the 50% Bonus Depreciation deduction to qualifying property acquired and placed in service before January 1, 2014.

The 2012 Act also extended the “Sec. 179 Expense Deduction” through 2013. The maximum deduction this year is $500,000, and is set to drop to $25,000 next year.

There’s been no legislative action to extend either tax provision. And there’s no fiscal cliff deadline looming between now and year end.

Bonus Depreciation and the Sec. 179 Expense Deduction can have a significant impact on lowering your 2013 tax bill. That’s especially true this year with the higher tax rates that are now in effect.

You can call us at 630-665-4440 or e-mail me at jerry.lopatka@duganlopatka.com to discuss your year-end tax planning situation.

Health Insurance Navigators Working Overtime

The Navigators were working overtime yesterday as millions of Americans started shopping for health insurance on insurance exchanges.

Health Insurance Navigators have been set up to help consumers, including individuals and small employers compare the health insurance options under the new law.

And the Department of Health and Human Services has published a comprehensive manual to help the Navigators do their job.

“The Health Insurance Marketplace Navigator Standard Operating Procedures Manual” offers helpful tips on how to protect consumer’s “personally identifiable information” and confidential tax return information.

Like this tip: “Do not leave documents that contain PII or tax return information on printers and fax machines” (Sec. 2.4.3)

Section 2.2 offers Customer Service Best Practices.

Like this one:

Listen: “By not listening you can become very frustrating to consumers.” (Sec. 2.2.3)

I didn’t see any reference to “Seek First to Understand, Then to Be Understood” – Steven Covey’s Habit #5 from “The 7 Habits of Highly Effective People”. But, to be fair, I didn’t read all 217 pages of the Manual.

You can find the Manual at http://www.healthreformgps.org/wp-content/uploads/navigator-SOP-manual-8-26.pdf

You might pick up some helpful tips for your organization’s employee manual.

Grand Opening for the Health Insurance Marketplace

The federal government shut down at midnight, but the health insurance exchanges opened for business today.

Some websites are reporting glitches today, but I got through around 6:15 this morning without a hitch at http://www.healthcare.com/insurance/online-quotes/.

Enter your zip code, and if you live in Illinois you’ll see 6 companies that are participating in the Illinois marketplace.

They ask for your name, address and phone number. I used a fake name and a local retailer’s address and phone number. You have to summit an e-mail address for the application to go through. I used none@gmail.com .

They also ask for your age, weight and height. I “applied” for insurance as a lean & mean 26 year old in good health.

The lowest cost option was a United Health One policy with a $10,000 annual deductible and a $50.07 monthly premium. Office visits are not covered. Prescription drugs have limited coverage and discount cards are available. You need to closely read the terms of coverage and policy exclusions.

The highest cost option was Humana Enhanced HAS/1500 with a $1,500 annual deductible and a $210.40 monthly premium. Office visits are covered as are prescription drugs, with varying levels of copays for both. Again you need to read the fine print.

I didn’t check out the Live Chat 24/7 and I didn’t add anything to my Shopping Cart. For what it’s worth, the websites say they’re secure. We report – you decide.

Happy shopping!

Update on the 3.8% Medicare Tax

Is the 3.8% Medicare Tax “America’s Nightmare”?

I’m not sure about that – but Form 8960 might be, at least according to Forbes.

Form 8960 is used to compute the new 3.8% Medicare Tax on net investment income that was enacted as part of Obamacare.

Google Form 8960 and you get “About 1,520,000 results (0.24 seconds)”. 

Topping the list is a Forbes article that notes “America’s long national nightmare is finally over: the IRS has released the draft form — Form 8960”.

The draft form is long overdue, since the law was passed back in 2010, and the tax is in effect as of January 1, 2013.  

Unfortunately, the form was released without instructions. So no one is really sure how the tax is applied in some circumstances involving pass thru entities, rental real estate, and gains and losses from certain property dispositions.

Although some areas need further IRS clarification, we’re already geared up to assess your Medicare Tax exposure, so give us a call.

You can find the Forbes article at http://www.forbes.com/sites/anthonynitti/2013/08/07/irs-releases-draft-form-8960-for-compuating-new-3-8-tax-on-net-investment-income/

Disaster Planning and Business Continuity

Time was running out for children’s magician Marty Hahne.

Earlier this summer, the USDA advised Hahne that under federal regulations, he needed a written disaster plan for his rabbit. The plan had to be completed by July 29 – or else.

The USDA wanted to know how Hahne would protect his rabbit during a disaster, and what he would do after the disaster, to make sure the rabbit gets cared for properly.

Sanity finally won out after an online story by the Washington Post. On Tuesday Secretary Tom Vilsack ordered his department to immediately review the order and make sure that “common sense be applied.”

I was getting nervous since we have a pet rabbit at home, Dusty. I’m not a magician, and Dusty doesn’t work much, but you never know what the bureaucrats will do next.

You can find Hahne at http://martythemagician.com/ .

And you can learn more about disaster planning for your business at http://www.sba.gov/content/disaster-planning .

And for business continuity plans check out http://www.ready.gov/business/implementation/continuity .