The IRS issued final regulations that help to distinguish capital expenditures from supplies, repairs, and maintenance. Virtually every business must comply with these new rules for its first tax year beginning on or after January 1, 2014. There are elections to be made to comply with the regulations.
One election is the de minimus safe harbor expensing which allow companies to expense all individual capital items costing less than $500 ($5,000 for companies with audited statements). If this election is made, it is across the board (meaning all items meeting the criteria must be expensed). All companies wishing to follow this rule must prepare a capitalization policy for the company.
Another election for small businesses with average annual sales of less than $10,000,000 is to potentially expense some building repairs, maintenance, and improvements. The expensing is for total repairs for the year of the lesser of 2% of the unadjusted basis of the property or $10,000.
Companies may now expense amounts paid for incidental items that would normally be capitalized or inventoried with an individual cost of $200 or less when purchased. Previously these items could not be expensed until placed in service.
The final two items pertain to buildings. The safe harbor rule allows you to expense routine maintenance and improvements if they are reasonably expected to be performed again during the class life of the property or within 10 years for buildings. The second ruling allows you to write off a structural component of a building as a disposition when a new replacement is purchased. The replacement component must then be capitalized.