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Repair Regulations Part I

Posted on June 11, 2014 by Leasa Magnuson in Business Tax

The IRS strikes again! In September 2013 the IRS came out with new regulations on materials & supplies, repairs and maintenance and capital expenditures. All three areas seem like common sense to me, that is until the IRS got a hold of them. They took 4 pages of regulations and turned it into well over 100!

It is a huge issue and a large topic to cover in one blog, so I’m going to try and break it down into several. Let’s start with materials and supplies. There are 3 types of materials and supplies, incidental, non-incidental and rotable and temporary parts. I’ll give you an example of each.

Incidental: I purchase two packs of pens, and expect to use them over two years. The cost is minimal and I don’t keep inventory of each pen. These are incidental compared to my business and can be deductible when paid.

Non-incidental: I purchase 10 calculators. The cost is minimal but I keep an inventory of each calculator and when it is placed in service. They would be non-incidental and are deductible when placed in service. (Notice they are not deductible when I buy them only when I place them in service)

Rotable or temporary: I have a vehicle which I only use for business and I purchase a small spare tire, which I store in the trunk of my car (and pray I never have to use). This is a temporary part and cannot be deducted until I dispose of it.

Now let’s discuss the definition of materials and supplies.

  •       Acquired to maintain, repair or improve a unit of property
  •       Has a cost of $200 or less
  •       Has an economic useful life of 12 months or less

Let’s look at an example of the economic useful life and how complicated it can get.

A business owner purchases a mold to create widgets. The mold is only good for 12 months or less and each mold costs $6,000. The mold is considered a supply since it lasts for less than 12 months despite it costing more than $200.

Now let’s apply it to your business.

1. Every time you purchase a material or supply think about its cost. Was it less than $200. If it was then expense it.
2. If the material or supply you purchased was more than $200 think about its useful life. If it will be consumed within a year, then expense it.
3. If the material or supply you purchased was more than $200 and will last longer than a year, you will need to capitalize it. Unless you have a policy on hand that states differently.

The policy that you must have on hand in order to expense materials and supplies must be dated by 12/31/13 to be in place for the 2014 tax year and the maximum you can expense with the policy in place is $500 unless your company is large enough that it has audited annual financial statements. I have a sample policy available for use by all my clients. If you would like one for your file please contact me.

Final Repair Regulations, Materials & Supplies

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An unexpected audit on our returns was triggered by an unfortunate investment loss. All of the horror stories we had heard about came to the top of our minds and the adrenaline started pumping. We had never been through an IRS audit and didn’t know what to expect. We gathered all of the information requested. Leasa reviewed what we had, suggested a few more items and then we dropped off the requested supporting documents to the IRS several days prior to the audit. Promptly at 9:00 a.m. on audit day Leasa was there to support me and answer the grueling questions I was sure would come from the investigator.

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We are very lucky to have her on our team and will continue to use Leasa in the future.

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