Advertising in MoldMaking Technology offers
Issue link: https://mmt.epubxp.com/i/617955
32 MoldMaking Technology —— JANUARY 2016 THE BOTTOM By Michael J. Devereux II, CPA, CMP, and Teri Samples, CPA After nearly a decade of issuing a long series of proposed and temporary regulations, the IRS has published final regulations to guide taxpayers in how to treat expenditures related to tan- gible property for federal income tax purposes. Such property includes buildings, machinery, equipment and vehicles, as well as costs incurred to replace major components or substantial structural parts of a unit of property (UOP). These regulations also address costs that result in a UOP's betterment, restora- tion or change in use. The final regulations help clear up the confusion that has existed for many years with regard to whether taxpayers can expense and deduct repair and maintenance costs, or if they must capitalize these expenditures, meaning record them as assets rather than expenses. Property and costs that are expensed can generally be deducted in the year they are paid or incurred, but those that are capitalized must be capitalized and depreciated over a period of years. Therefore, expensing is usually preferred by most taxpayers. The following recommen- dations address the IRS regulations: Separate repairs from improvements. Two sections of the IRS code distinguish "repairs" from "improvements" in determining whether tax- payers can expense and deduct tangible property expenditures, or must capitalize and depreci- ate them. Expenses allocated to acquiring, producing and improving tangible property must be capitalized and depre- ciated over the appropriate use- ful life, while those allocated to incidental repairs and mainte- nance can be expensed and deducted as paid or incurred. The tangible property regulations help make this distinction by allowing a taxpayer to deduct routine maintenance costs, which are defined as recurring activities that are necessary to keep the property in "ordinarily efficient operating condition." These activities—inspection, cleaning, testing and replacement of worn and damaged parts, for example—should be expected to be performed more than once during the property's alterna- tive depreciation system (ADS) life. Incidental materials and supplies, such as machining center or fixture cleaning materials, can be deducted as soon as they are purchased. However, non-incidentals, such as machine components and wire EDM materials, may not be deducted until they are actually used or consumed. Rotable components (those that can be repeatedly restored to a working and ser- viceable condition), and temporary and standby emergency spare parts cannot be deducted until they are disposed. Capitalize expenses. The repair regulations define acquiring, producing or improving tangible property as any activity that results in one of the following: • Betterment of the property. It corrects a pre-existing defect or causes a material increase in capacity, productivity, efficiency, strength, quality or output. • Restoration of the property. It returns a unit of property to an ordinarily efficient operating condition after it had deterio- rated and was no longer functional. • Adaptation of the property. It makes it possible to use the asset for a new or different purpose. If an expenditure meets any one of these criteria, it cannot be expensed and deducted. Rather, it must be capitalized and depreciated over the life of the asset. Here are three examples illustrating how these regulations might apply to mold building: Example 1. Say the compressor unit in a commercial build- ing's HVAC unit has failed and needs to be replaced. While Mold builders should consider whether the activities associated with internally developed machinery or fxturing meet the defnition of research, and therefore escape the requirement for capitalization. New Tangible Property Regulations: Capitalization vs. Expense Federal and state income tax compliance can be a burden for mold builders. The tax code and related guidance changes daily, creating both opportunities and exposure. This series aims to provide industry- specific guidance to help mold builders minimize these burdens within the letter of the law.