Overview – After years of court battles, temporary regulations and administrative guidelines, the IRS has issued the Final Regulations (TD 9636). The IRS interpretative regulations provide guidelines on how and when a taxpayer is allowed to deduct a repair expense as opposed to capitalize a business expense when purchasing and improving tangible or real properties. The 200 pages of regulations are relatively more taxpayer friendly than their predecessors. Yet the Final Regulations are still complex and require time and investment from taxpayers to assure compliance with its guidelines. This article will cover essential aspects of the Final Regulations. The ramifications of these regulations are vast since they apply to all businesses, regardless of industry. Many taxpayers have not yet changed their financial and administrative procedures to follow the new regulations and become compliant with such changes.
Applicable Date – Whether a taxpayer is on a calendar basis or fiscal year, he must apply the Final Regulations to taxable years after Dec. 31, 2013. The taxpayer has the option to amend his tax returns for tax years beginning on Jan. 1, 2012, and apply the changes retroactively. Before summarizing the Final Regulations, we should clarify what is a repair as opposed to capitalization in regard to tax concepts. A repair produces immediate tax benefit by expensing a payment in the current tax year. You can capitalize an improvement and expense the total payment over many tax years based on depreciation rules.