14A — December 6 - 19, 2013 — Mid Atlantic Real Estate Journal
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F inancial D igest
By Arthur DaPonte, David Mendelsohn and Daniel Asbaty, WithumSmith & Brown, PC The long-awaited final repair and maintenance regulations: they’re here…
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n 2006, 2008 and again in 2011, the IRS issued separate sets of tempo-
picture on many formerly-ex- haustive compliance aspects facing taxpayers. Three key areas with pervasive changes are betterments, materials and supplies, and de minimis safe harbor elections. Within each of these topics, the IRS has defined its regulations and pro- vided broader, less-situational applications, which should help to alleviate some of the compli- ance burden. BETTERMENTS One portion of the repair and maintenance regulations that has been impacted greatly by the release of the new regu-
lations is the topic of better- ments. The definition of a betterment is the amelioration (the act of making something better) of a material condition or defect that existed prior to the acquisition of property or arose during the production of property. The betterment could result in a material addition to a unit of property (including a physical enlargement, expan- sion, or extension) or result in a material increase in the ca- pacity, productivity, efficiency, strength, or quality of a unit of property or its output. As ap- plied to buildings, an amount
results in a betterment to the building if it results in a better- ment to the building structure or any of the building systems. For example, a retail building that is undergoing a renova- tion project can have costs that constitute expenses, capitaliza- tion, or mixture of both. Gen- eral appearance maintenance (paint, etc.) and cosmetic or layout changes (not constitut- ing increase in production) would be expensed. Additions to a building (for example, a loading dock or an overhead door) and systems (upgrade to an electrical panel to accom-
modate a power door) would be capitalized as betterments. A unit of property is defined as consisting of all the compo- nents of property that are func- tionally interdependent. Spe- cial rules exist for determining a unit of property for buildings, plant property, network assets, condominiums, cooperatives, and leased property, and for the treatment of improvements (including leasehold improve- ments). A unit of property can be improved if it is adapted to a new or different use. For ex- ample, a drug store that remod- els to include a walk-in clinic would automatically qualify for capitalization. In contrast, if a grocery store opens a gelato counter, the intended use of the store is still to sell groceries so this would not be a new or dif- ferent use. Quantitative bright lines (i.e. dollar amounts) do not exist for determining the material- ity of an addition to a unit of property or an increase in ca- pacity, productivity, efficiency, strength, quality, or output of a unit of property. Instead, qualitative factors should be used to provide fair and equi- table treatment for all taxpay- ers in determining whether a particular cost constitutes a betterment. For example, while amounts paid for work performed on an office build- ing or a retail building may clearly comprise a physical enlargement or increase the capacity, efficiency, strength, or quality of such building, un- der certain facts, it is unclear how to measure whether work performed on an office building or retail building increases the productivity or output of such buildings, as those terms are generally understood. Thus, the productivity and output factors would not generally apply to buildings. On the other hand, it is appropriate to evaluate many items of manu- facturing equipment in terms of output or productivity as well as size, capacity, efficiency, strength, and quality. For ex- ample, if a hotel replaces 8 of 20 sinks in its lobby bathroom at a cost of $4,000 and the cost of the entire plumbing system is $200,000, the amount should be capitalized as the sinks qualitatively represent a sub- stantial structural part. The application of the im- provement standards to a building structure and the Continued on page 22A
rary regula- tions regard- ing repairs and mainte- nance expen- ditures. The long-awaited final regula- t i ons have
Rebecca Machinga
been released with an effec- tive date of January 1, 2014. The final regulations attempt to remove the intricacies of repair and maintenance treat- ment and aim to paint a clearer
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