Repairs, Maintenance & Improvements

Tangible Property Regulations – Frequently Asked Questions



Rev. Proc. 2015-20 allows the expensing of items of $500 or less (but see a $2,500 level mentioned further below) by making a written, annual election (§1.263(a)-1(f)) to apply the de minimis safe harbor to do so.   The de minimis safe harbor election permits a taxpayer to not capitalize (as equipment or similar); and permits a taxpayer to treat as materials or supplies, certain amounts paid for such tangible personal property that it acquires or produces during the taxable year providing that the taxpayer meets certain requirements and the property does not exceed certain dollar limitations ($500 $2,500 in this case,  which is generally an increase from $500 previously and earlier from $200 previously).

Businesses may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice, as long as:

  1. Accounting policy: it establishes at the beginning of the tax year accounting procedures expensing for non-tax purposes de minimis items:
    1. costing less than a certain dollar amount, or
    2. items with an economic life of 12 months or less,

  2. Book/tax consistency: it recognizes the de minimis costs as expenses on its books and records, and

  3. de minimis amount: the amount paid for the property does not exceed $500 $2,500 per invoice (or per item as substantiated by the invoice) or other amount as determined by the IRS.

  4. A written election to use the safe harbor for each taxable year in which qualifying amounts are
    incurred is made by attaching a statement to the income tax return for the taxable year.



Regarding the $2.500 safe harbor limit IRS guidance is “Examiners should not negotiate with taxpayers to set de minimis thresholds beyond the safe harbor limits. A taxpayer that seeks a deduction for amounts in excess of the amount allowed by the safe harbor or by agreement with IRS examining agents will have the burden of showing that such treatment clearly reflects income.”

 



IRS Notice 2015-82 increases the above $500 cut-off level to $2,500 effective January 1, 2016 and it states that generally the earlier use of the $2,500 level will not be challenged during an IRS audit examination for tax years after December 31, 2011.




Rev. Proc. 2015-20 allows for the Safe Harbor Election for Small Taxpayers by making a written, annual election (§1.263(a)-3(h)) for real property.  A business is not required to capitalize an improvement, and therefore, may deduct the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements, or similar costs that fall into the safe harbor election for small taxpayers. The requirements of the safe harbor election for small taxpayers are:

  1. Average annual gross receipts are less than $10 million; and

  2. Owns or leases building property with an unadjusted basis of less than $1 million; and

  3. The total amount paid during the taxable year for repairs, maintenance, improvements, or similar
    activities performed on such building property doesn’t exceed the lesser of:

    1. 2% of the unadjusted basis of the eligible building property; or
    2. $10,000; and

  4. A written election to use the safe harbor for each taxable year in which qualifying amounts are
    incurred is made by attaching a statement to the income tax return for the taxable year.



Rev. Proc. 2015-56 allows for a Remodel-Refresh Safe Harbor Method of Accounting / Election for Retail stores and Restaurants for expenditures on their existing real property. A business would revoke any existing partial disposition election and then irrevocably elect to expense under §162(a) 75% of the costs incurred to remodel or refresh a qualified building.  This method is in lieu of the annual §1.263(a)-3(h) election mentioned above.  The filing of a Form 3115 in generally required, using designated automatic accounting method change number “222.”




Cost Segregation Studies and other information are detailed in the Internal Revenue Service Audit Techniques Guide (ATG) Capitalization of Tangible Property Treas. Reg. § 1.263(a) and related regulations.