The IRS released the final version of its Tangible Property Repair Regulations.
The somewhat business-friendlier and simplified final regulations go into effect for tax years beginning Jan. 1, 2014.
These regulations are extremely important. For owners of tangible business property, including commercial buildings and residential rental properties, they represent the most significant change in the tax laws since 1986.
For generations, a battle has been going on between owners of business property and the IRS over two IRC Sections.
IRC Section 263(a) says that amounts paid to acquire, produce or improve tangible property must be capitalized over its useful life and not deducted in a single year.
On the other hand, IRC Section 162(a) says that a taxpayer may deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business, including the costs of supplies, repairs and maintenance.
The upshot is that if an expense is classified as an improvement, it must be capitalized alittle at a time over many years — 39 years in the case of commercial buildings. If it’s a repair or maintenance, it can be currently deducted in a single year.
Obviously, business property owners prefer expenses to be classified as repairs (or maintenance) so they can deduct the whole amount in a year. The IRS often prefers the opposite.
Until Sept. 13, the IRS had produced no useful regulations describing how to determine whether something was a repair or an improvement. Now, for the first time ever, we have very highly detailed guidance on this issue that the IRS is bound to follow. So now, if you want to know whether you can deduct in a single year the money you spend to replace all the windows in your rental property or repave the driveway, you can look to these regulations for your answer.