Kansas City Business Journal (January 18, 2013)

IRS tweaks bring new guidelines on business expense vs. depreciation.

Along with a new year comes new tax rules.
One of the biggest changes for 2013 involves the way businesses should account for the purchase of materials and supplies and for big property improvements.

The Internal Revenue Service released new guidelines regarding the difference between an expense that a company can write off immediately and a capital expense that must be depreciated.

For example, if a company needs roof repairs, it can be considered an expense. If the company replaces the roof or the expense reaches a point when it has to be financed, then it would need to be depreciated during a 39-year period. Deciding how to record the expense affects the company’s taxable income.

“What we’re seeing in this current iteration is that the IRS is explaining these activities better and clarifying things a lot more,” said Tom Scarpello

“What we’re seeing in this current iteration is that the IRS is explaining these activities better and clarifying things a lot more,” said Tom Scarpello, managing partner of Omaha-based Scarpello Consulting, which has a location in Overland Park. “If you were following the 2008 guidelines, you probably don’t have to make too many changes. But if you were taking advantage of some of those gray areas, you should pay attention.”

Ed Bartak, managing director of tax services for McGladrey LLP’s Kansas City office, said the IRS is training its agents to enforce the new rules. He suggests that clients review and document their policies.

“Once you do something on a tax return, you’ve established a method, right or wrong,” Bartak said. “To come off of that method, you need to file a form with the IRS.

“The IRS is expecting to see people make method changes based on their new rules. If you don’t provide some indication that you’ve paid attention to these regulations, you should expect some type of inquiry from the IRS.”
Bartak said another heavy area of enforcement involves global assets. The IRS requires filings to disclose foreign bank accounts worth more than $10,000 or ownership of foreign entities. Failure to file can result in a penalty of $10,000 for each instance. The IRS was lenient when the rules were new, but the rules now have been in force for more than a year, and leniency is becoming rare.

But not every move will hurt or limit taxpayers. Scarpello said Congress extended bonus depreciation, which allows businesses to take an immediate deduction of 50 percent of the value of new equipment or personal property. The IRS also allowed qualified leaseholder improvements to be depreciated for 15 years instead of 39 years. Read More

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