In late 2013, the Internal Revenue Service (IRS) released final regulations that will greatly impact a taxpayer’s ability to capitalize or expense both purchases and amounts paid to maintain and improve tangible and real property.  We are pleased that the IRS has released these regulations because they provide clarity to many gray areas that surround these topics.

So, what do the new regulations mean for you?  Well, simply put – ALL ENTITIES, including individuals, that have tangible or real property used in business or investment will be impacted.  The IRS has allowed for some early adoption of the rules, but all taxpayers must be in compliance effective for tax year 2014.

Capitalization Policy for Purchases of Tangible and Real Assets
For the purpose of this communication, real property is defined as buildings used in a business or investment. Tangible assets are everything else, such as computers, equipment, furniture, tools, supplies, and leased equipment. Intangible assets are not included in the new regulations.

The new rules require that taxpayers capitalize all tangible and real asset purchases unless a De Minimis Safe Harbor Election is filed. To claim the election, you must have a capitalization policy in place as of January 1, 2014. This policy may be established retroactively.

The De Minimis Safe Harbor Election will allow taxpayers to expense amounts paid for tangible and real property under a ceiling limitation of either $5,000 or $500.  The $5,000/$500 limits are per invoice, or item (as substantiated by the invoice).  Also, a taxpayer may expense materials and supplies under $200 with a useful life of 12 months or less.

• The $5,000 limit applies to  taxpayers that have an audited financial statement or a financial statement that must be submitted to a Federal or State government agency
• The $500 limit applies to all other taxpayers
• This election is made by filing an annual statement (prepared by your Whalen tax advisor)  that is  attached to your 2014 Federal tax return

Client Action:
Effective for 2014, all taxpayers need to re-evaluate their capitalization policies.  Contact your Whalen & Company advisor for a sample.

Capitalization Policy for Repairs and Improvements of Tangible and Real Property
A large section of the new regulations deals with repairs and improvements made to tangible assets and buildings.  Under the new regulations, assets must be divided up into units of property (UOP). UOP are all components of the asset that are functionally interdependent. For example, buildings are broken down into nine UOP systems: HVAC, plumbing, electrical, escalators, elevators, fire protection and alarm systems, security systems, gas distribution system, and other structural components.

How a UOP is treated depends on if the repair or improvement replaced a major component. Generally, the larger the unit of property, the more likely that costs will be classified as a repair and then expensed.

There are exceptions, such as the Small Taxpayer Safe Harbor and the Routine Maintenance Safe Harbor.

Client Actions:

• If you plan to do any major repairs or improvements to property, please provide the details of the project to your Whalen & Company advisor.
• If you own a building that you lease to multiple tenants, please be sure to indicate the tenant space where the improvements or repairs were done.

As a firm, Whalen & Company is implementing “best practices” to ensure that our clients are in compliance with the new tax changes.  In addition to this blog, we are offering an on-demand webinar that provides additional information and guidance on the new regulations.  If you are interested in viewing this webinar, click here: https://whalencpa.wpengine.com/2014-repair-regs.html.  Plus, Whalen advisors are proactively contacting clients regarding the new rules.

For more detailed information on how the new regulations affect your specific situation, please contact your Whalen advisor at 614-396-4200.

Tax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible.

Have you maxed out your 2013 limits? While it’s too late to add to your 2013 401(k) contributions, there’s still time to make 2013 IRA contributions. The deadline is April 15, 2014. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2013).

A traditional IRA contribution also might provide some savings on your 2013 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2013 tax return.

If you don’t qualify for a deductible traditional IRA contribution, consider making a Roth IRA or nondeductible traditional IRA contribution. We can help you determine what makes sense for you.

If you purchased qualifying assets by Dec. 31, 2013, you may be able to take advantage of these depreciation-related breaks on your 2013 tax return:

1. Bonus depreciation. This additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With only a few exceptions, bonus depreciation isn’t available for assets purchased after Dec. 31, 2013.

2. Enhanced Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets — including both new and used assets — up to $500,000, but this limit is phased out dollar for dollar if purchases exceed $2 million for the year. For assets purchased in 2014, the expensing and purchase limits have dropped to $25,000 and $200,000, respectively.

Even though this may be your last chance to take full advantage of these breaks, keep in mind that the larger 2013 deductions may not necessarily prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations, future deductions could be more valuable, such as if you move into a higher marginal tax bracket.

Let us know if you have questions about the depreciation strategy that’s best for your business.

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Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:

• The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.

• The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phaseouts apply to these credits. If your income is too high to qualify, you might be eligible to deduct up to $4,000 of qualified higher education tuition and fees. The deduction is limited to $2,000 for taxpayers with incomes exceeding certain limits and is unavailable to taxpayers with higher incomes.

If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2013 tax returns — and which will provide the greatest tax savings — please contact us.

One of the most common mistakes investors make is forgetting to increase their basis in mutual funds to reflect reinvested dividends. Many mutual fund investors automatically reinvest dividends in additional shares of the fund. These reinvestments increase tax basis in the fund, which reduces capital gain (or increases capital loss) when the shares are sold.

If you neglect to include reinvested dividends in your basis, you’ll end up paying tax twice: first on the dividends when they’re reported to you on Form 1099-DIV, and again when you sell the shares and the reinvested dividends are included in the proceeds.

To help ensure you’re properly accounting for dividend reinvestments when you’re filing your 2013 tax return — or for other tax-smart strategies for your investments — contact us today.