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5029200-114300 521 Main St., Ste #3 Bottineau, ND 58318Phone 701-228-5173701-477-9565Fax 701-228-289800 521 Main St., Ste #3 Bottineau, ND 58318Phone 701-228-5173701-477-9565Fax 701-228-2898SCHAD R. STRAND, P.C._______________________________Certified Public AccountantFinal “Repair” Regulations – effective 1/1/14Dear 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 SuppliesYou 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 MaintenanceYou 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 MaintenanceIf 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 LimitsThe 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.DefinitionsA 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 HarborUnder 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; and2. The maintenance keeps (rather than puts) the property in an ordinarily efficient operating condition; and3. 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 MonthsRepairs <$500Repairs >$500 – Routine Maint.Repairs >$500 – B.R.A.Many additional nuances and applications apply to these new small-business-unfriendlyRegulations 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 ................
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