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TAX

or stored for later installation. Temporary spare Sec. 1.263(a)-1(f)(1)(i) provides a limit of $500,
parts are materials and supplies that are used but Notice 2015-82 increased the safe harbor for
temporarily until a new or repaired part can be taxpayers without an AFS to $2,500 for tax years
installed and then are removed and stored for later beginning on or after Jan. 1, 2016. The election is
installation. Standby emergency spare parts are made annually by attaching a statement to the tax
generally acquired for a specific piece of machin- return.)
ery or equipment, are normally expensive and
not acquired in quantity (e.g., may only acquire a Improvements vs. repairs and maintenance
single spare part), and are not repaired or reused. The rules under Regs. Secs. 1.162-4 and
Spare parts are generally deductible when 1.263(a)-3 allow taxpayers to deduct amounts paid
disposed of by a taxpayer. Taxpayers may also for repairs and maintenance to tangible property to
elect annually to instead capitalize the cost of the the extent that the amount paid is not considered
spare parts and begin to depreciate the asset when an improvement to a unit of property. The final
placed in service. regulations provide definitions and rules to analyze
costs that are incurred to determine if they are
General rules for capitalization improvements to a unit of property. An amount
Under Regs. Secs. 1.263(a)-1 and -2, taxpayers is an improvement if it results in a betterment,
are generally required to capitalize amounts paid restoration, or adaptation to the unit of property.
or incurred to either acquire or produce tangible The rules provide a safe harbor for routine
property — both real and personal — includ- maintenance activities and therefore not an
ing the invoice price, transaction costs paid to improvement to the property. An amount qualifies
facilitate the acquisition of the property, costs for as routine maintenance to a building if the taxpayer
work performed prior to the date that the unit of reasonably expects to perform the maintenance
property was placed in service, and amounts paid more than once during the 10-year period begin-
to defend or perfect title to the property. ning when the building structure or system was
Regs. Sec. 1.263(a)-1(f) provides a de minimis placed in service. An amount is routine mainte-
safe-harbor election, which allows taxpayers to ex- nance on tangible personal property if the taxpayer
pense certain amounts paid to acquire or produce expects to perform the maintenance more than
tangible property to the extent expensed for book once during the class life of the property.
purposes. Taxpayers with an applicable financial The rules also provide for a couple of elections.
statement (AFS) (generally, audited financial Small taxpayers (those with average annual gross
statements) may deduct amounts up to $5,000 per receipts for the prior three years of $10 million or
item or per invoice, as long as the taxpayer has a less) may elect to currently deduct amounts paid
written book accounting policy providing for such to improve building property up to the lesser of
deductions as of the beginning of the tax year. $10,000 or 2% of the building’s unadjusted basis.
Taxpayers without an AFS do not need to have a An eligible building is one with an unadjusted
written policy, but the limit is only $2,500. (Regs. basis of $1 million or less. The taxpayer must

IN BRIEF

■ Final regulations issued in 2013 and accounting changes. law, will phase down for eligible
determine whether taxpayers may ■ Such changes include the limitation on property placed in service after 2022.
currently deduct or must capitalize the deductible interest under Sec. 163(j), ■ If taxpayers change their accounting
costs to acquire, produce, or improve with certain adjustments applicable to methods as a result of revising their
tangible property. Also known as the tax years beginning after 2022. treatment of tangible property, they
“repair regs.,” these rules entail methods ■ Another such change concerns 100% must determine whether the change
and elections that taxpayers may need bonus depreciation under Sec. 168(k), qualifies as automatic under revenue
to revisit in light of more recent tax law the percentage of which, under current procedures.
To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

28 | Journal of Accountancy February 2023