Let’s Explore How the Tangible Property Regulations Came to Be
The IRS and Treasury began a project in 2004 to update and clarify regulations that determine capitalization or expensing expenditures on tangible property.
The Internal Revenue Service and many taxpayers were in constant conflict and court battles over whether expenditures on tangible property (including building components) are deductible as a one-time expense or must be capitalized and recouped through depreciation. The discrepancy between deductible repairs and capital improvements was generally decided through case law precedent. However, it was (and still is) primarily based on the facts and circumstances of the repair, renovation, or improvement. Timing also played and continues to play a significant factor in determining expense versus capitalization.
To reduce disagreements with taxpayers, the IRS issued the final regulations in September 2013. These are commonly referred to as the “repair regulations” and provide rules regarding the treatment of expenditures for acquiring, sustaining, or improving tangible property, including expenditures on buildings. The final tangibles regulations are effective for taxable years beginning on or after January 1, 2014.
The final tangibles property regulations apply to all taxpayers that create, purchase, or implement major renovations or improvements on tangible property. In addition, these regulations apply to C corporations, S corporations, partnerships, LLCs, and individuals filing Form 1040 with a Schedule C, E, or F.
Therefore, the tangible property regulations are critically important for businesses with substantial real estate holdings. There are no bright lines in the repair regulations, but the IRS provided many examples which must be read and understood before deciding to expense or capitalize building expenditures.
Learn more about the Tangible Property Regulations here.