The IRS recently issued Revenue Procedure 2015-20, which makes it easier for small businesses to apply the new repair and maintenance regulations. The new regulations clarify when taxpayers must deduct as opposed to capitalize expenses incurred for acquiring, maintaining, repairing and replacing tangible property. Prior to the IRS’s issuance of the final regulations, courts applied a facts and circumstances analysis to determine whether a repair or maintenance expense was a deductible expense to maintain a property’s efficient operating condition or a capital expenditure incurred to prolong the property’s life, increase its value or adapt it to a different use. The final regulations partially incorporated existing law and also adopted several safe harbors for situations in which expenses are currently deductible. The final regulations generally apply for expenses incurred in taxable years beginning on or after January 1, 2014 and may be adopted for amounts paid or incurred in taxable years beginning on or after January 1, 2012.
The Revenue Procedure applies to small businesses, defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three taxable years. Ordinarily, taxpayers may adopt the new repair and maintenance regulations as an automatic change of accounting method by filing a Form 3115. Under the Revenue Procedure, small businesses do not have to file a Form 3115 to adopt the new regulations. Instead, covered taxpayers may adopt the regulations by making a section 481(a) adjustment that takes into account amounts paid or incurred in taxable years beginning on or after January 1, 2014.