Capitalization Election

The Repair Regulations put in effect on January 1, 2014, contain several elections and safe harbors.  We have previously covered the de minimis safe harbor election (http://koscpa.blogspot.com/2014/08/de-minimis-safe-harbor.html), the routine maintenance safe harbor (http://koscpa.blogspot.com/2014/09/routine-maintenance-safe-harbor.html) while this article will address the capitalization election.

The Regulations provide taxpayers with an annual, irrevocable election to capitalize amounts paid during the taxable year for repair and maintenance of tangible property that are capitalized for book purposes. The amounts capitalized under the election are depreciated beginning when the asset is placed in service.

This election allows the taxpayer to align its tax treatment with capitalization policies used for its books and records, thereby eliminating any book-tax differences and reducing administrative costs.  Taxpayers making this election can also avoid the application of difficult and often subjective rules in determining whether a particular expenditure is currently deductible as a repair or must be capitalized. 

This annual election is made by attaching a statement to the taxpayer's timely filed (including extensions) original tax return for the tax year for which the election is made. Please contact a KOS advisor today if you would like to discuss how this election may apply to you or the next steps needed to obtain available tax benefits under the new Regulations. 

KOS Volunteers at Feed My Starving Children

KOS participated in this year's IL CPA Day of Service on Friday, September 17th.  KOS volunteered at the Feed My Starving Children facility in Libertyville, IL.  Employees had a great time working together and helping pack 102 boxes of food to be shipped overseas. 


KOS chose to work with FMSC because of their emphasis on small group involvement and outcome-focused participation. This volunteer experience offered a wonderful way for KOS to engage, motivate and foster employee collaboration with the selfless benefit of feeding the world’s starving children.

Founded in 1987, Feed My Starving Children is a non-profit Christian organization committed to feeding God’s children hungry in body and spirit. The approach is simple: children and adults hand-pack meals specifically formulated for malnourished children, and these meals are shipped to nearly 70 countries around the world.

KOS to Participate in IL CPA Day of Service

Governor Quinn has proclaimed September 19, 2014 to be CPA Day of Service throughout Illinois.  KOS is proud to be part of this wonderful day.  Employees from the firm will be traveling to the Feed My Starving Children (FMSC) facility in Libertyville, IL for an afternoon of helping others.

KOS chose to work with FMSC because of their emphasis on small group involvement and outcome-focused participation. This volunteer experience offers a wonderful way for KOS to engage, motivate and foster employee collaboration with the selfless benefit of feeding the world’s starving children.

Founded in 1987, Feed My Starving Children is a non-profit Christian organization committed to feeding God’s children hungry in body and spirit. The approach is simple: children and adults hand-pack meals specifically formulated for malnourished children, and these meals are shipped to nearly 70 countries around the world.

Routine Maintenance Safe Harbor

The Repair Regulations put in effect on January 1, 2014, contain several elections and safe harbors.  We have previously covered the de minimis safe harbor election, while this article will address the routing maintenance safe harbor.

The Regulations provide that the cost of certain routine maintenance does not need to be capitalized.  Under the routine maintenance safe harbor, an amount paid is deductible if it is for recurring activities that a taxpayer expects to perform to keep a unit of property in its ordinarily efficient operating condition during its ADS class life. The safe harbor applies to a building, structural component of buildings, and building systems. However, when applied to buildings, the taxpayer must reasonably expect to perform the activities more than once during the 10-year period beginning with the placed in service date of the building, structural component or building system. 

It is important to take into consideration the recurring nature of the activity, industry practice, manufacturer's recommendations, and the taxpayer's experience when determining whether an activity is considered routine maintenance. However, it is not conditional that the maintenance be performed more than once during the property's ADS class life. 

Note this safe harbor is not elective. Every taxpayer falls within this safe harbor, and therefore must account for the expenditure within these parameters. Please contact a KOS Advisor today if you would like to discuss how this safe harbor may apply to you or the next steps needed to obtain available tax benefits under the new Regulations.

My Social Security Online Account Sign-Up

A personal online my Social Security account is a source of information beginning from the time an individual starts working and continuing throughout the time they receive Social Security benefits. With a my Social Security account, members of the public with Internet access can obtain benefit verification information, update their personal information and start or change direct deposit of their benefit payment.

To create an account, go to the Social Security web site (www.socialsecurity.gov) and enter “my Social Security account” in the upper right hand search box.  An individual provides some personal information and answers to some questions that only they are likely to know.  Once entered the website will prompt a user on how to set up their account.  Even if an individual does not receive benefits, they may use a my Social Security online account to review their Social Security statement, earnings record and estimates of retirement, disability, and survivors benefits.

 

The Social Security Administration has announced that they will no longer issue Social Security Number verification reports at their field offices, but will continue to issue replacement cards at the local offices.

Please do not hesitate to contact a member of the KOS team if you have any additional questions about using the my Social Security website.

Unit of Property Defined

Central to the Repair Regulations, effective January 1, 2014, is the definition of a unit of property.  In order to determine whether you have improved your business or rental property, you must determine what the property consists of.  The IRS refers to this as the "unit of property" (UoP).  Identification of the UoP determines whether work done on a component will be a deductible repair or a capitalizable expense.

In general, a UoP includes all components that are functionally interdependent (i.e. the placing in service of one component depends upon the placing in service of another component).  For example, consider the components required to make a vehicle operable.  The vehicle could not be places into service without an engine, or without tires; therefore, the vehicle, engine, and tires may be one unit of property.

Special definitions for a unit of property apply for buildings, leased property, and plant property.  Plant property means functionally interdependent machinery and equipment used to perform an industrial process.  Under this definition, a manufacturing line could be one unit of property.

Under the Regulations, buildings are required to be dividend up into as many as nine different UoP's:  the entire structure and up to eight separate building systems.  An improvement to any of these UoP's must be capitalized.

The entire building and its structural components as a whole are a single UoP.  This includes components such as walls, roofs, partitions, floors and ceilings, as well as any permanent coverings (paneling and tiling), windows, and doors.  In addition, the following eight building systems are separate UoP's where an improvement to any of these must also be depreciated:  heating and air conditioning systems, plumbing, electrical, escalators, elevators, fire protection and alarm systems, security systems, and gas distribution systems.

Unfortunately, it isn't as straightforward as it seems.  There are variations to the UoP depending on the use of the building.  For example, if the building is a condominium complex, the unit of property is the individual unit owned by the taxpayer and the structural components that are part of each condo unit.  There is a similar rule for leased buildings which defines the unit of property as each building and its structural components or the portion of each building subject to the lease and the structural components associated with the leased portion.

Transitioning to these new rules might prove challenging, especially for rental properties.  Please contact a KOS advisor today if you would like to discuss how these regulations apply to you or the next steps needed to obtain available tax benefits.

Written Capitalization Policy

As we continue to address various areas of the Repair Regulations, which became effective January 1, 2014, it is important to stress again the importance for all taxpayers to adopt or update a written capitalization policy for non-tax purposes. In order to take advantage of certain provisions in the final regulations, and as good business practice, a written policy is required.

The written capitalization policy should include the following:

1. Amounts paid for property costing less than a specified amount that will be deducted on the financial statements (internal books and records if no financial statements are issued).
2. Amounts paid for assets that have an economic useful life of 12 months or less that will be deducted on the financial statements (internal books and records if no financial statements are issued).

Please contact a KOS advisor today if you would like to discuss your current capitalization policy and how these regulations apply to you.