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CHAD R. STRAND, P.C.

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Certified Public Accountant

Final “Repair” Regulations – effective 1/1/14

Dear Client,

On September 19, 2013 the Internal Revenue Service issued new final Regulations which go in to effect for tax years beginning on or after January 1, 2014. These incrediblycomplex Regulations require you to keep much better records for repairs, maintenanceand supplies, and require you to specifically analyze each of these items costing over$500, assuming you do not receive audited financial statements. We are writing you thisletter to help you understand that if you do not analyze these individual items andclassify them appropriately we will be required to spend substantial additionalprofessional time in order to analyze your records. Here is asummary of the new rules and what you will need to do to comply with the new IRSrequirements.

With these below changes we requestthat you bring all invoices for repairs, supplies, and fixed asset purchases with you to your future tax appointments.

Materials and Supplies

You are now allowed to write off any individual supply costing $200 or less, lasting lessthan 12 months, or fuel, lubricants or similar items that will be used in 12 months or less. Please adda new expense account to your accounting system titled “Supplies <$200 or used w/in 12 Months”,and enter any expenses meeting the above categories into this account. Anythingcosting more than $200 and not consumed within 12 monthswill be treated as a capital asset that must bedepreciated over several years. For these items, please set up an account called “Supplies > 12 Months”. Special rules apply for extra parts (rotable parts).

Equipment - Repairs and Maintenance

You are now allowed to write off any individual equipment item or equipment repair ormaintenance item costing $500 or less (as long as you have a written policy at beginning of year to do so – please contact us to request a copy of a sample capitalization policy). For buildings a different rule applies asdiscussed below. We also suggest entering individual items costing this amount or lessinto your “Repairs <$500” account, but refraining from adding any items above that cost to thisaccount. Items costing more than this will generally be required to be individuallyanalyzed under the rules below to determine if they are qualified expenses or treated asequipment that must be depreciated over several years. There is a Safer Harbor rule which allows “routine maintenance” costs to still be deducted as a repair (***see Routine Maintenance Safe Harbor below).

Building - Repairs and Maintenance

If your building has a cost basis of $1,0000,000 or less a special rule applies. Any repairsthat are expected to be made more than once in ten years, and costing less than

$10,000 individually may be written off as repairs. Items that are not expected to bereplaced more once in ten years must also be examined individually under the rulesbelow to determine if they may be treated as expenses or depreciable assets.

Expenses Above the Limits

The IRS now requires you to examine each individual item outside of the above limits todetermine if it has been a betterment, restoration or adaptation of the main unit ofproperty. A unit of property is now defined as the “inter-related parts composing onelarger unit”. For example a unit of property is a tractor composed of inter-related parts, soany repairs to the tractor must be examined as to whether they are a betterment, restorationor adaptation of the tractor as a whole rather than its individual components. For buildingsthe test must first be applied to the building as a whole and then applied to itscomponents of HVAC, plumbing, electrical, structure, elevators, security, fire protectionor gas distribution. Anything considered a betterment, restoration or adaptationunder these rules must be depreciated and listed as equipment, otherwise it may beexpensed as repairs.

Definitions

Abetterment is defined as fixing a condition that existed at purchase, or an increase inthe physical size or capacity of an asset. Betterments must be capitalized anddepreciated so they should be added to your equipment account.

A restoration is generally defined as a cost to return a non-functional asset to use, thecost of rebuilding an asset after the end of its depreciable life or replacing a majorcomponent of the unit of property. For example a transmission replacement would be thereplacement of a major component of a unit of property of a truck and must becapitalized and depreciated.

Finally, an adaptation cost is one incurred to change the function of a piece of equipmentor property to a different use and must also be capitalized and depreciated.

*** Routine Maintenance Safe Harbor

Under the routine maintenance safe harbor, an amount paid for routine, regular maintenanceperformed on a unit of property other than a building or structural component of abuilding is deemed not to improve that unit of property and may be deducted as a “repair”. This safe harbor applies only if:

1.The taxpayer expects to perform the activity more than once over the property’sADS (10 years for equipment) class life; and

2.The maintenance keeps (rather than puts) the property in an ordinarily efficient operating condition; and

3.The need for the maintenance results from the taxpayer’s own use of theproperty (rather than existing wear and tear from a prior owner’s use).

• A special safe harbor rule for routine maintenance for buildings allows a deduction for items of maintenance that are expected to last less than ten years. The inclusion of a routine maintenance safe harbor for buildings is aimed at alleviating some of the difficulties that could arise in applying the improvementstandards for certain restorations to building structures and building systems.The final regulations use 10 years as the period of time in which a taxpayer mustreasonably expect to perform the relevant activities more than once.

Suggested New Accounts to Be Set Up:

  • Supplies <$200 or Used W/In 12 Months
  • Repairs <$500
  • Repairs >$500 – Routine Maint.
  • Repairs >$500 – B.R.A.

Many additional nuances and applications apply to these new small-business-unfriendly

Regulations and we would be happy to discuss them in an appointment with you or yourbookkeeper to help you keep the costs of IRS compliance down.

Thank You,

Chad R. Strand P.C.

Certified Public Accountant