By Jeff Baker.
As mentioned in another post, "IRS regulations will impact your farm's deductions of supplies," the IRS has issued new regulations that are impacting Hoosier farmers. There are several parts of this regulation, including those pertaining to the deduction of repairs and maintenance.
In this post, we'll take a closer look at these changes and how they impact your farm.
With regard to repairs, the new regulations create a Small Building Safe Harbor under 1.263(a)-3(h) that allows qualifying small taxpayers with the prior three years of gross revenue below $10 million and buildings with original adjusted basis below $10 million to write off expenditures for repair improvements up to the lesser of $10,000 or 2% of the building's original adjusted basis or cost.
If the total expenses on the building for the year exceeded this threshold, you would be required to deduct all repairs and improvements that were materially significant. Therefore, if you replaced 20% of the roof, you would probably deduct it as a repair. However, if you replaced half of the roof you would capitalize it. In between 20% and 50% would be based on your (or the IRS') judgment.
Tax issues on routine equipment maintenance
The last part of the new regulations, which are mandatory and must be adopted, relate to routine repairs and maintenance of equipment, which the regulation renames units of property. The Routine Maintenance and Repair Safe Harbor, 1.263(a)-3(n) allows taxpayers to annually deduct expenditures that are necessary to keep the unit of property in normal operating condition.
The regulations define those expenditures as those expected to occur two or more times during the useful life of the piece of equipment at acquisition.
For computer equipment, the useful life is five years; whereas, for most mechanical equipment it is seven years and for buildings 10 years. The amount of the expenditure is not important.
An example would be a farmer's combine. It is normal that every two or three years they are inspected and repairs are made to keep them in operating condition. The cost of this maintenance can run into the tens of thousands of dollars, but under this regulation they can be deducted annually.
Jeff Baker, CPA, CFP, CSA, M.S. Financial Planning, is owner of Baker Retirement & Wealth Management, 866-244-3517.
Readers should not act upon the presented content or information without first seeking appropriate professional advice. This article is provided for informational purposes only and does not reflect the opinions of Farm Progress.