On September 13, 2013, the Treasury Department and Internal Revenue Service (IRS) issued long-awaited final so-called Repair Regulations (T.D. 9636) that address how expenses in connection with acquiring, maintaining and improving tangible property, including multifamily buildings, should be treated for tax purposes (i.e., depreciated or expensed).
According to the rules, owners must depreciate expenses related to constructing or permanently improving a building, restoring property or converting it to an alternate use. Routine maintenance costs, however, can be immediately expensed. The rules are generally effective for taxable years beginning on or after January 1, 2014.
NMHC/NAA viewed the rules as overly complex and burdensome when the proposal was issued in December 2011. At our urging, the final rule includes some important changes to the “de minimis” provisions that make it less onerous for apartment firms to comply.
Under the proposed de minimis rule, taxpayers issuing Applicable Financial Statements (AFSs) would have been allowed to expense as repair costs the greater of 0.1 percent of the taxpayer’s gross receipts for the year or two percent of the taxpayer’s total depreciation and amortization expenses. Entities not issuing AFSs, including many smaller multifamily operators, would have only been able to deduct materials and supplies that cost $100 or less.
To avoid requiring operators to track literally every expense exceeding $100, the industry asked for additional relief. Under the final rule:
- The ceiling for what can be expensed by taxpayers with an AFS is eliminated. These taxpayers can deduct up to $5,000 per invoice or per item for qualified costs that are substantiated by an invoice.For taxpayers without an AFS, the $100 threshold has been raised to $500 per invoice or per item as substantiated by an invoice. Taxpayers will be required to have written accounting procedures in place to take advantage of this de minimis rule, however.
- The final rules also expand a “routine maintenance safe harbor” to the benefit to apartment providers. Under the safe harbor, firms can expense routine maintenance costs, defined as maintenance expected to be performed at least once every 10 years.
NMHC/NAA’s comment letters on the proposed and temporary rules is available here.
In addition, in early January 2014, the IRS has issued related guidance (Revenue Procedure 2014-16 and Revenue Procedure 2014-17) to modify the procedures for obtaining the automatic consent of the Commissioner for certain changes in methods of accounting for amounts paid to acquire, produce or improve tangible property.