Regulations Will Mean
(Revised November 2016)
The final regulations have an effective date of January 1, 2014. As discussed later on, there will be a significant tax break for small businesses starting in 2017.
The regulations "sort of retain" the old test that were applied to determine whether an expenditure is deductible as a repair or needs to be capitalized:
The major change is in the definition of an “asset”. Under the old rules, all three tests look at the entire asset (e.g. the entire building). The temporary regulations break up the term “asset” into 4 new separate assets:
In the case if a new roof, the cost would probably have to be capitalized since the new roof materially adds to the value (and significantly prolongs the useful life) when applying the test to the building structure (by itself) rather than the entire building. The replacement of a building's central air conditioning unit is another example of the impact of this temporary regulation.
The big break for small business
The final regs do provide for some safe harbor rules. The most important safe harbor allows for expensing of any single item costing $500 or less per item regardless of what type of property is involved. Starting with 2017, the $500 per item limit will be raised to $2,500.
For entites issuing audited financial statements, the threshold is higher; it is $5,000.