Author Topic: thoughts on new 2014 IRS de minimus rules for capitalization vs expense  (Read 4332 times)

johnhenry

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For landlords/business owners:  Have any thoughts on new 2014 IRS de minimus rules for capitalization vs expense?  Have you had any expenditures in 2014 that you would have previously needed to capitalize, but plan to expense instead?  I'm guessing that most on this forum won't have businesses that meet the requirements that allow up to $5000 expenses, since it requires audited financials, etc.  But even the lower $500 limit could be very beneficial to those in the residential rental business.


Links below the rule and a few articles that review it.

http://www.irs.gov/irb/2013-43_IRB/ar05.html

http://www.wgcpas.com/tax-alerts-2013-articles-2/288-tax-alert-irs-issues-final-fixed-asset-regulations

http://www.claconnect.com/Tax/IRS-De-Minimus-Tangible-Property-Capital-Expenditure-Deductible-Repair.aspx

http://www.tomcopelandblog.com/2013/12/new-depreciation-rule-for-2014-will-save-providers-time-and-money.html


conpewter

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Re: thoughts on new 2014 IRS de minimus rules for capitalization vs expense
« Reply #1 on: August 20, 2014, 08:31:55 AM »
This is my first year owning a rental so I've not looked in to this very much, most everything I did to the house before I rented it (we owned it previously) was done by me with salvaged or cheap materials (craigslist) so I didn't have enough money in to it to make me want to try and figure out how to add it to capital, especially considering it wasn't a rental before I made these updates/repairs.

In any case it looks like the new regs make it harder to count something as an expense, and really doesn't clarify well (still) what is a repair and what is an improvement.  The window example on this wgcpas link you provided really gives me pause :/

TheSimpleLife

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Re: thoughts on new 2014 IRS de minimus rules for capitalization vs expense
« Reply #2 on: August 20, 2014, 08:50:19 AM »
Overall,  I think the guidance provides some simplicity and clarity to small time landlords. 

-If a repair is under $500 bucks, expense it. 
-If not, need to decide whether it is an improvement or repair (like mentioned above, this is and always has been the grey area)

IRS always makes things more difficult than necessary.  As usual, these rules and regs are written with large real estate developers, owners, LIHC, and others in mind, not the small time landlord.  But in the end, it is the small fry that gets hit with higher compliance costs (via CPA or own research time).

My two cents as a CPA with a bunch of small time/part-time landlords:

-Do your best to keep good records and receipts for all purchases related to your properties.
-If under $500, always plan on full write off.
-If over and you hire a CPA for tax help, call and ask advice or make sure it is noted when you turn in your information.
-If you self-prepare and are worried, always choose the most conservative route (capitalize).
-If you understand your chance of audit is extremely low due to size and other factors and don't care that you may have to capitalize the improvement/repair upon an audit/review, expense anyways.

If OP or others have much more complicated situations than a few rental properties, I hope you are wise enough to invest in a good relationship with a competent CPA.

Just my 2 cents.

johnhenry

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Re: thoughts on new 2014 IRS de minimus rules for capitalization vs expense
« Reply #3 on: August 20, 2014, 02:09:48 PM »
SimpleLife or others....., how about these scenarios??

Unit 1:
Carpet to replace old: $460, purchased directly at warehouse store.
Carpet installation: $180 paid to carpet installer.

Seems like it would be fine to expense since items were purchased separately and neither exceeded $500.  Although the total cost of the flooring replacing did exceed $500.



Unit 2:
Carpet to replace old: $324, purchased directly at warehouse store.  Receipt #101
Pad to replace old: $210, purchased directly at warehouse store.       Receipt #101
Carpet installation: $170, paid to carpet installer.

The cost of carpet alone does not exceed $500.  With the pad it does.  Obviously, not all carpet replacement requires a replacement of the pad, but it was replaced in this situation.  Would it make a difference if the carpet, pad were on 2 different invoices?  What if they were purchased from 2 separate stores?



Unit 3:
Carpet to replace old: $450, purchased directly at warehouse store.
Laminate flooring to replace old: $450 purchased directly at warehouse store.
Carpet and laminate installation: $570, paid to installer.  One invoice, but separate line items for each floor.

Each type of flooring alone is under $500 limit.  Together they exceed $500.  The installer gave one invoice for both "jobs" together and that combined invoice exceeds $500.  Even with separate invoices for each installation, the cost of each would exceed $500 when adding material + labor.  If capitalization of the labor is required because the installation cost is over $500....a) could it be expensed if there were 2 invoices?  b) does just the $570 installation get capitalized? Or the $570 + the cost of the material?  Can the material cost of the carpet and laminate even be listed separately since they were both part of "flooring" for the same unit?  If they can be listed as separate "expenses", is that just because they are different types of flooring?  Or would you be able to expense $450 of carpet for one room and separately expense $450 of carpet for another room?



Please show your work :) 

I'm sure everyone has different interpretations.  And different IRS agents may even have different interpretations. :)  But I am wondering what folks really think the law requires in these situations.



TheSimpleLife

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Re: thoughts on new 2014 IRS de minimus rules for capitalization vs expense
« Reply #4 on: August 21, 2014, 09:08:17 AM »
Unit 1:
Carpet to replace old: $460, purchased directly at warehouse store.
Carpet installation: $180 paid to carpet installer.

Seems like it would be fine to expense since items were purchased separately and neither exceeded $500.  Although the total cost of the flooring replacing did exceed $500.

Assuming you buy carpet at somewhat retail prices and pay installers more than beer money, the above example is surely a repair b/c of the prices involved (assuming it isn't a one room slum).  This is because you are not extensively remodeling the property, you are simply repairing it back to original condition. Repair = expense.

Playing along and assuming it should be capitalized, I would still personally expense as you have two separate invoices and in reality two separate transactions (assuming installer did not work for warehouse store).


Unit 2:
Carpet to replace old: $324, purchased directly at warehouse store.  Receipt #101
Pad to replace old: $210, purchased directly at warehouse store.       Receipt #101
Carpet installation: $170, paid to carpet installer.

The cost of carpet alone does not exceed $500.  With the pad it does.  Obviously, not all carpet replacement requires a replacement of the pad, but it was replaced in this situation.  Would it make a difference if the carpet, pad were on 2 different invoices?  What if they were purchased from 2 separate stores?

Again, ignoring the fact that these numbers scream repair rather than restoration, I would expense if 2 separate invoices and capitalize if same invoice.  Even though carpet and pad are not physically the same, you would usually never replace the pad without also replacing the carpet.  So even though the carpet can be replaced without the pad, the fact that you are replacing both makes them one and the same (in my mind).

So, even though it would be more hassle, if it was my rental property, I would purchase the carpet on one receipt, then get right back in line and purchase the pad on a different receipt.  Yes, I get that this is playing games, but the IRS examples leave me believing that invoices and receipts DO MATTER if you were examined.


Unit 3:
Carpet to replace old: $450, purchased directly at warehouse store.
Laminate flooring to replace old: $450 purchased directly at warehouse store.
Carpet and laminate installation: $570, paid to installer.  One invoice, but separate line items for each floor.

Each type of flooring alone is under $500 limit.  Together they exceed $500.  The installer gave one invoice for both "jobs" together and that combined invoice exceeds $500.  Even with separate invoices for each installation, the cost of each would exceed $500 when adding material + labor.  If capitalization of the labor is required because the installation cost is over $500....a) could it be expensed if there were 2 invoices?  b) does just the $570 installation get capitalized? Or the $570 + the cost of the material?  Can the material cost of the carpet and laminate even be listed separately since they were both part of "flooring" for the same unit?  If they can be listed as separate "expenses", is that just because they are different types of flooring?  Or would you be able to expense $450 of carpet for one room and separately expense $450 of carpet for another room?


Same thoughts as above example.  Ask for a separate invoice from installer.  Tell him that upfront before he begins job.  Pay for laminate and carpet separately at store/warehouse.  Still seems like repairs even if all paid together.  You couldn't be replacing the majority of flooring at those prices, so it would be a repair to make the property livable (not an improvement).

That is the crux of the matter in my opinion.  Are you substantially improving the property or are you repairing it to working condition?  All three examples seem like repairs to me. 

The other issue is this:  you might ask three different tax advisors and get three different answers.  Ultimately, you are responsible for what you report on your return.  So you have to either trust your tax advisors opinion or decide on a position yourself and live with the consequences.

johnhenry

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Re: thoughts on new 2014 IRS de minimus rules for capitalization vs expense
« Reply #5 on: August 22, 2014, 08:49:12 AM »
Thanks, simple, for the analysis.  I see it the same way.