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.
THE ELECTION TO CAPITALIZE
The final regulations include an entirely new option that allows a laundry business to treat amounts paid for repairs and maintenance to tangible property as amounts paid to improve that property. Thus, if the laundry business chooses, the amounts paid as property improvements become assets subject to depreciation—as long as the expenditures are business-related and the amounts are treated as capital expenditures on the operation’s books and records.
Another significant change in the new regulations allows a laundry business to take “retirement losses” on components. If, for example, a building’s roof is replaced and the old roof disposed of, the operation now has the option of taking a retirement loss for the old roof. Of course, the replacement roof must be capitalized but while the replacement must be capitalized, the retirement loss can be claimed on the roof replaced.
PROPERTY UNITS
Much of the guidance provided by the IRS revolves around what constitutes a “Unit of Property” (UOP). In general, the smaller the UOP being placed in service, repaired, or improved, the more likely it is that the UOP’s cost will have to be capitalized.
For example, work on an ozone generator is more likely to be classified as an expenditure that must be capitalized if the generator is classified a separate UOP rather than as part of an entire system.
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.
Check back Wednesday for the conclusion!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].