The Repair Regulations: Income Tax Considerations for Tax-Exempt Organizations
Author: Robert Conner
The IRS recently issued final “repair” regulations clarifying when tangible property expenditures may be deducted instead of capitalized for tax purposes. For tax years beginning on or after January 1, 2014, exempt organizations with unrelated business income (UBI) or taxable subsidiaries should look to these new rules to determine the proper tax treatment of expenditures related to tangible property acquisitions, improvements, repair and maintenance activities.
One of the provisions most favorable to taxpayers in the repair regulations is the new de minimis safe harbor, which allows companies to deduct tangible property expenditures falling below their financial statement capitalization policy threshold. To qualify for the safe harbor election, an organization must have an accounting policy in place on the first day of the applicable tax year that calls for expensing amounts paid for property less than a specified amount. If such requirements are satisfied, the otherwise capital acquisition cost of tangible property subject to the policy may be currently expensed for tax purposes.
For taxpayers with applicable financial statements—generally an audited financial statement—the policy can be as high as $5,000 per invoice or item and must be in writing as of the beginning of the tax year. For all other taxpayers, the amount is $500 or less per invoice or item, and the policy is not required to be in writing.
Exempt organizations with UBI or taxable subsidiaries should review applicable expensing policies in light of the new de minimis safe harbor to determine if the expensing thresholds are appropriate. If your organization does not currently have a written capitalization policy, consider adopting a policy prior to the start of your next fiscal year. The regulations do not require board-level approval to adopt or change a written capitalization policy. However, organizations considering a change should consult their tax advisor and external auditor (if applicable) to reconcile any competing tax and nontax considerations.
To learn more about how the repair regulations may apply to your organization, or for help formalizing a capitalization policy that makes sense for your organization, contact your BKD advisor.