CPAs with middle-market clients struggled over the past couple of years with the repair regulations more than with any other tax issue in recent memory. Given the opportunity to expense property under Sec. 179, was the time and effort devoted to the repair regulations worth it?
That depends. If a taxpayer's capital expenditures fall within the Sec. 179 dollar limitations, the repair regulations add no incremental tax benefit. However, Sec. 179 is a perennial component of last-minute extenders legislation, and for tax years beginning after 2014, the limitation is set at only $25,000. The limitation may once again be increased to the $500,000 threshold sometime during or for the 2015 tax year, but with the push in Congress for comprehensive tax reform, that outcome may be less likely than in past years. In contrast, the repair regulations have been finalized as of Jan. 1, 2014, and now are a permanent part of the tax landscape.
The Sec. 179 election to expense certain business assets allows a deduction in the year the eligible property is placed in service, limited to $500,000 between 2010 and 2014 and $25,000 for 2015 unless extended retroactively (Secs. 179(a) and 179(b)(1)). The limitation is reduced when the cost of eligible property placed in service during a tax year exceeds $2 million between 2010 and 2014 and $200,000 for 2015 (Sec. 179(b)(2)).
A taxpayer's return must specify the items and cost of property to which the Sec. 179 election applies (Sec. 179(c)(1)). Although the election is usually irrevocable, for tax years after 2002 and before 2015, a taxpayer may revoke the Sec. 179 election for any property (Sec. 179(c)(2)). This statutory provision expands the time frame provided in Regs. Sec. 1.179-5(c).
The repair regulations permit deduction of expenses for materials and supplies for items costing up to $200. This provides a tax deduction in addition to any amounts expensed under Sec. 179. The repair regulations' de minimis safe harbor of $500/$5,000 per item also will preserve the Sec. 179 dollar limitation, but at the cost of a book net income charge.
Thus, when capital expenditures exceed the overall dollar limitations in Sec. 179, applying the repair regulations in conjunction with Sec. 179 may provide a larger overall deduction than either Sec. 179 or the repair regulations would allow separately.
For a detailed discussion of the issues in this area, see "The Interaction Between Sec. 179 and the Repair Regs.," by Mark A. Sellner, CPA, J.D., in the August 2015 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief, The Tax Adviser
Sec. 179 depreciation claimed by corporations, 2002—2011
Corporations claimed $8.4 billion in Sec. 179 depreciation deductions in 2011 on Form 4562, Depreciation and Amortization, the last year for which complete data are available. The largest year-over-year increases in Sec. 179 expensing since 2002 occurred when the maximum expensing allowance and investment limitation were substantially increased. In 2003, expensing of $7.47 billion was almost double the $3.97 billion claimed in 2002 after the limits were increased to $100,000/$400,000 from $24,000/$200,000 for 2002. Expensing grew 23% to $9.67 billion in 2010 when the limits were increased to $500,000/$2 million from $250,000/$800,000 for 2009.