Before you can close the books on 2014, you will need to take a closer look at the new IRS regulations that deal with the question of whether a repair is allowed to be reported as an expense and deducted currently, or whether you are required to capitalize the cost of improvements and depreciate the cost over a number of years. Because restaurants are frequently replacing aged equipment or undergoing remodeling, this is a question you face repeatedly. Effective January 1, 2014, the IRS – in their quest to simplify the decision process – has issued new standards which impact the restaurant industry (as well as other industries).
Before the new regulations were issued, you deducted your current year costs and then capitalized those improvements identified as having been made to the building in which your restaurant is located. Under the new rules, every building (or piece of equipment) – including its structural components – is considered a single unit of property (UOP). This means that you capitalize and depreciate the building’s components in the same manner and over the same life as the building. So if you improve the UOP by purchasing a new water heater, the water heater must be depreciated over the same life as the building, normally 39 years. It is extremely important that, on your asset schedule, you individually identify each component of property you purchase since, if you were to replace the property, you will be able to write off the undepreciated portion of the cost. Since some equipment is also considered a single unit of property, It is important to identify each UOP with a shorter life than a building or replaced separately.
There is a safe harbor for small taxpayers that permit restaurants to expense certain improvements. To qualify, average gross receipts must be $10 million or less; the building must have had an initial cost of $1 million or less, and the amount paid for repairs, maintenance and improvements were not greater than $10,000, or 2% of the unadjusted basis of the building, whichever is less.
De Minimis Rule for Deducting Purchases
You can expense the cost of tangible property purchased during the year if the amount paid is less than $500 per invoice; however,you cannot take a partial deduction if your purchase was greater than $500. In order to qualify, your accounting capitalization policy which explains this treatment must have been written and used at the beginning of the 2014 tax year. The tax return must include an annual election.
Materials and Supplies
You can expense incidental materials and supplies not in inventory if their cost is less than $200. If they are inventoried, non-incidental materials and supplies are deductible when either used or consumed. There are additional tax elections available for rotable, temporary, and emergency spare parts.
Repairs and Maintenance
Routine maintenance of buildings and other equipment can be expensed. “Routine” is defined as maintenance you can reasonably expect to incur more than once in a ten-year period, or more than once during an asset’s depreciable “class life.” Restaurant equipment “class life” is generally nine years.
The new IRS regulations are going to create many accounting questions and tax issues for the 2014 tax year. For help applying these rules to your restaurant operation, or to learn more about ORBA and how our Restaurant Group can help you, contact Bob Rifkin at 312.670.7444. Visit orba.com to learn more about our Restaurant Group.