Have you thought about your accounting method lately? The IRS has — and the result is the “repair” regulations. As you may have heard, these regulations became effective in January 2014. They control the way you record costs incurred to acquire, produce, or improve tangible property.
What do the repair regulations have to do with your accounting method? Your taxable income is generally computed using the same “method of accounting” that you apply to your books, such as cash or accrual basis. Your method of accounting also encompasses the way you treat special items, including depreciation. Since the repair regulations are essentially rules detailing whether your tangible property related expenses may be deducted or must be capitalized and therefore depreciated, the regulations affect your method of accounting.
Adoption of the new rules is mandatory. However, you have a choice as to how you comply when your total assets or your average annual gross receipts are less than $10 million. For example, you can use a simplified method. In that case, you apply the repair regulations to acquisitions and disposals of property for 2014 and future years. Alternatively, you can elect to review your treatment of past tangible property expenditures and apply the repair regulations to prior as well as future years.
Among other factors, your decision will depend on the accounting method you used for certain items. For instance, say you capitalized expenses in the past that might now be considered “replacements” under the new rules. You may realize current year tax savings by applying the repair regulations to prior years and taking a deduction now.
The new rules contain other changes, including annual elections that you must make beginning with your 2014 tax return. Please schedule an appointment so we can help you determine the right choices for your business.