What is a “repair” and what is an “improvement?” Is my business using the right accounting method to remain in compliance with current tax requirements? These questions now have clearer answers, thanks in part to the new Internal Revenue Service (IRS) repair regulations (aka tangible property regulations) that have recently gone into effect.
The final regulations focus on the deduction and capitalization of expenditures related to tangible property. While these changes will affect all businesses that acquire, produce or improve tangible property, one segment will be particularly impacted: the real estate industry.
New regulations open doors for businesses
The new IRS regulations provide real estate organizations an opportunity for accelerated tax deductions in the short term and increased tax savings in the long term.
For example, if you replaced the roof on a building – and didn’t segregate the cost of this component when the building was placed in service – then the IRS repair regulations’ new methodology affords you a chance to retire the original cost of the roof. When you retire the cost of the old roof, you can accelerate any remaining depreciation on that component into the current tax year.
The new regulations will require most organizations to file a change in accounting method, or CAM, to reflect their compliance with the new regulations. As a result, organizations can use this filing to alter past improvements to tangible property and accelerate the remaining depreciation into the current tax year.
IRS changes help owners increase tax savings
While the new repair regulations help real estate owners accelerate deductions on their current tax returns, the new regulations also create an opening to establish long-term savings.
For instance, an owner of an older building may replace components every few years. The new regulations mean that this owner now has the option of retiring the replaced component each time a replacement is made – as well as the accumulated depreciation on that component.
When you retire accumulated depreciation, you eliminate depreciation recapture required when you sell the property. This leads to a permanent 5 percent difference in the rate between recaptured Section 1250 gain at 25 percent and capital gain at 20 percent. If you use the example of a roof once more, then you can realize tax savings when you first replace a roof and when you replace it several years later.
Team with expert advisors
These issues only scratch the surface of the finalized IRS repair regulations. It is crucial that you remain aware of the changes – and how they affect your current and future tax filings. With that in mind, make sure you are discussing the IRS repair regulations with a trusted tax advisor. Should you have any questions, please give our professionals at Clark Schaefer Hackett a call today.
