ARDMORE, Pa. — Since the inception of the Internal Revenue Code, the IRS and laundry businesses have been at odds over whether expenditures made are currently deductible or whether they must be capitalized and recovered through depreciation over time.
Now, after seven years of drafts and proposed rules, the IRS has issued final regulations addressing whether a cost is a deductible repair or a capital expenditure.
The IRS has also released a long-awaited Revenue Procedure that details the procedures for obtaining the “automatic” consent of the IRS to change accounting methods as required by the new repair regulations.
ACCOUNTING METHOD CHANGES
The new repair regulations have been described as the most comprehensive changes to the issues of capitalization and write-off in more than 20 years. Some of the new regulation’s safe harbors and elections can be implemented on the laundry operation’s annual tax return. Unfortunately, since the IRS considers many of the provisions to be accounting methods, laundry businesses must file not one but numerous Forms 3115, Application for Change in Accounting Method.
A business owner seeking to change to a method of accounting permitted under the final regulations must get IRS consent before implementing that new method. Under the automatic consent procedures, the IRS will consent when a Form 3115, Application for Change in Accounting Method, is attached to the laundry operation’s timely filed tax return for the year of change (with extensions). A signed copy must also be sent to the agency’s national office.
QUESTIONS ANSWERED
The question of capitalization vs. expensing of business property has long boiled down to a question of whether the expenditures maintain or restore property in or to its ordinarily efficient operating condition (expense) or appreciably prolong its life, materially increase its value, or adapt it to a different use (capitalization).
The tax strategies and methods used in the past may no longer be either feasible or advisable. Through newly created safe harbors and other taxpayer-favorable features, the new regulations will provide tax planning opportunities—and potential tax savings—for coin laundry owners that will face fewer disputes with the IRS.
While the new repair regulations bring helpful clarity and order to the treatment of tangible property, and go a long way to answering the question of what is a repair and what is an expenditure that must be capitalized and depreciated, they pose considerable compliance risks for every laundry business. However, because many store owners will soon discover they need to elect new tax strategies that require an application for an accounting method change, professional assistance may be a necessity.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an attorney or tax adviser for advice regarding your particular situation.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].