S
521 Main St., Ste #3
Bottineau, ND 58318
Phone 701-228-5173
701-477-9565
Fax 701-228-2898
www.strandcpa.com
CHAD R. STRAND, P.C.
_______________________________
Certified Public Accountant
Final “Repair” Regulations – effective 1/1/14
Dear Client,
On September 19, 2013 the Internal Revenue Service issued new final Regulations which go in to effect
for tax years beginning on or after January 1, 2014. These incredibly complex Regulations require you to
keep much better records for repairs, maintenance and supplies, and require you to specifically analyze
each of these items costing over $500, assuming you do not receive audited financial statements. We are
writing you this letter to help you understand that if you do not analyze these individual items and classify
them appropriately we will be required to spend substantial additional professional time in order to
analyze your records. Here is a summary of the new rules and what you will need to do to comply with the
new IRS requirements.
With these below changes we request that you bring all invoices for repairs, supplies, and fixed
asset purchases with you to your future tax appointments.
Materials and Supplies
You are now allowed to write off any individual supply costing $200 or less, lasting less than 12 months,
or fuel, lubricants or similar items that will be used in 12 months or less. Please add a new expense
account to your accounting system titled “Supplies <$200 or used w/in 12 Months”, and enter any
expenses meeting the above categories into this account. Anything costing more than $200 and not
consumed within 12 months will be treated as a capital asset that must be depreciated over several
years. For these items, please set up an account called “Supplies > 12 Months”. Special rules apply for
extra parts (rotable parts).
Equipment - Repairs and Maintenance
You are now allowed to write off any individual equipment item or equipment repair or maintenance item
costing $500 or less (as long as you have a written policy at beginning of year to do so – please contact
us to request a copy of a sample capitalization policy). For buildings a different rule applies as discussed
below. We also suggest entering individual items costing this amount or less into your “Repairs <$500”
account, but refraining from adding any items above that cost to this account. Items costing more than
this will generally be required to be individually analyzed under the rules below to determine if they are
qualified expenses or treated as equipment that must be depreciated over several years. There is a
Safer Harbor rule which allows “routine maintenance” costs to still be deducted as a repair (***see
Routine Maintenance Safe Harbor below).
Building - Repairs and Maintenance
If your building has a cost basis of $1,0000,000 or less a special rule applies. Any repairs that are
expected to be made more than once in ten years, and costing less than
$10,000 individually may be written off as repairs. Items that are not expected to be replaced more once
in ten years must also be examined individually under the rules below to determine if they may be treated
as expenses or depreciable assets.
Expenses Above the Limits
The IRS now requires you to examine each individual item outside of the above limits to determine if it
has been a betterment, restoration or adaptation of the main unit of property. A unit of property is now
defined as the “inter-related parts composing one larger unit”. For example a unit of property is a tractor
composed of inter-related parts, so any repairs to the tractor must be examined as to whether they are a
betterment, restoration or adaptation of the tractor as a whole rather than its individual components. For
buildings the test must first be applied to the building as a whole and then applied to its components of
HVAC, plumbing, electrical, structure, elevators, security, fire protection or gas distribution. Anything
considered a betterment, restoration or adaptation under these rules must be depreciated and listed as
equipment, otherwise it may be expensed as repairs.
Definitions
A betterment is defined as fixing a condition that existed at purchase, or an increase in the physical size
or capacity of an asset. Betterments must be capitalized and depreciated so they should be added to your
equipment account.
A restoration is generally defined as a cost to return a non-functional asset to use, the cost of rebuilding
an asset after the end of its depreciable life or replacing a major component of the unit of property. For
example a transmission replacement would be the replacement of a major component of a unit of
property of a truck and must be capitalized and depreciated.
Finally, an adaptation cost is one incurred to change the function of a piece of equipment or property to a
different use and must also be capitalized and depreciated.
*** Routine Maintenance Safe Harbor
Under the routine maintenance safe harbor, an amount paid for routine, regular maintenance performed
on a unit of property other than a building or structural component of a building is deemed not to improve
that unit of property and may be deducted as a “repair”. This safe harbor applies only if:
1. The taxpayer expects to perform the activity more than once over the property’s ADS (10 years for
equipment) class life; and
2. The maintenance keeps (rather than puts) the property in an ordinarily efficient operating condition;
and
3. The need for the maintenance results from the taxpayer’s own use of the property (rather than existing
wear and tear from a prior owner’s use).
• A special safe harbor rule for routine maintenance for buildings allows a deduction for items of
maintenance that are expected to last less than ten years. The inclusion of a routine maintenance safe
harbor for buildings is aimed at alleviating some of the difficulties that could arise in applying the
improvement standards for certain restorations to building structures and building systems. The final
regulations use 10 years as the period of time in which a taxpayer must reasonably expect to perform the
relevant activities more than once.
Suggested New Accounts to Be Set Up:
 Supplies <$200 or Used W/In 12 Months
 Repairs <$500
 Repairs >$500 – Routine Maint.
 Repairs >$500 – B.R.A.
Many additional nuances and applications apply to these new small-business-unfriendly
Regulations and we would be happy to discuss them in an appointment with you or your bookkeeper to
help you keep the costs of IRS compliance down.
Thank You,
Chad R. Strand P.C.
Certified Public Accountant