New Regulations Will Mean
Fewer Current Deductions
but a Small Business Break

(Revised November 2016)
Before acting on any of these topics, you need to consult with your professional advisor. 

The IRS has issued final regulations (T.D. 9564) that will result in fewer current deductions for major building repairs. Instead, these “repairs” will have to be capitalized and written off over a number of years.  For example, the cost of a new roof will have to be capitalized under the temporary regulations; under current law, the cost of a new roof is generally deductible as a repair.

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:

  1. the "asset" is not adopted to a different use
  2. did the expenditure add materially increase the asset's fair market value of the “asset”
  3. did the expenditure significantly prolong the asset’s useful life

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:

  1. building structure
  2. electrical system
  3. heating and mechanical components
  4. elevators

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.

To take advantage of this safe harbor rule, you need to adopt a written accounting requiring expensing of these items. The written policy must be in effect by the beginning of the year. Also, an election is required and must be included on your Federal tax return.

For entites issuing audited financial statements, the threshold is higher; it is $5,000.