The IRS has issued final regulations addressing whether a cost is a deductible repair or a capital expenditure.
A print shop must generally capitalize amounts paid to acquire or produce tangible property, unless the property falls into the category of materials and supplies, or qualifies for the so-called “de minimis” Safe Harbor. The new guidelines cover the following:
Materials and supplies: Incidental materials and supplies may be deducted when purchased. Tax-deductible materials or supplies are tangible personal property (other than inventory) that is used or consumed in the taxpayer’s operations. This can include: fuel, lubricants, water, or similar items that can be reasonably expected to be consumed in 12 months or less. It also includes: other property with an economic useful life of 12 months or less; an item with an acquisition or production cost of $200 or less; and a component acquired to maintain, repair, or improve a unit of tangible property that’s not acquired as part of another unit of property. These are items for which records of consumption are not kept and where immediately deducting or expensing them will not distort the print shop’s income. Materials and supplies that do not fit these definitions are deducted when used or consumed.
Rotatable and temporary spare parts: This category is a subset of materials and supplies. Several alternative methods are allowed:
• The cost of rotatable and other spare parts is deducted only when they are disposed of;
• Spare parts are capitalized and depreciated; or
• The cost of spare parts can be deducted when first installed, but you should record income at its fair market value when the part is removed (continuing that process until claiming a final loss at disposition).
Staying safe with Safe Harbors
Safe Harbors can best be compared to legitimate “loopholes,” designed by lawmakers to limit the full impact of a tax law or provision that might be harmful to a particular group of taxpayers. Under the repair regulations, you might benefit from Safe Harbors in the following examples:
* De Minimis Safe Harbor election: A print shop may elect a “de minimis” Safe Harbor to deduct amounts paid to acquire or produce property, up to a dollar threshold of $5000 per invoice (or per item in some cases), but only $500 for those without.
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