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IRS Debuts Final Repair Regs

Business owners have lots of questions when it comes to deciding whether to expense costs or capitalize fixed assets, such as:

• Can I expense a laptop computer I purchased for $699 in the current year?
• What qualifies as standby emergency spare parts, and can I capitalize them for tax purposes?
• Can I use the same accounting capitalization policy for book and tax purposes?
• I replaced the roof on my factory -- but haven't yet finished depreciating the original roof -- how should I handle the disposition of the old roof?

In the past, tax preparers and business owners criticized the IRS capitalization guidelines for being ambiguous, complex and subjective. There were few quantitative brightline rules. Instead, the appropriate tax treatment was governed by qualitative "betterment" tests and Tax Court cases. The IRS released temporary guidelines in 2011 to clarify how to apply Internal Revenue Code Sections 162 and 263.

Two Tax Treatments The IRS final capitalization regulations are sometimes known as the Repair Regs. But they cover far more than just repairs. They address money spent to acquire, produce or improve property, plant and equipment. When deciding how to handle tangible property costs, you generally have two options: Deduct now. Internal Revenue Code Section 162 allows you to deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business, including the costs of certain supplies, repairs and maintenance. Capitalize and depreciate later.Internal Revenue Code Section 263 requires you to capitalize amounts paid to acquire, produce or improve tangible property. Capitalized costs are generally not deducted in the current tax year; they are depreciated over their economic useful lives. In general, taxpayers prefer to deduct as many tangible property costs as possible to lower their taxable income in the current period. But the decision to expense or capitalize an item is just a matter of timing. You will pay the same taxes over the life of the asset, regardless of how you classify the costs, as long as tax rates and laws remain consistent. If you expect higher tax rates or more restrictive tax laws in the future, you might prefer to capitalize costs to reduce taxable income in future periods. Some items are easily classified as a deductible business expense (such as a box of staples) or a capital expenditure (such as a new forklift). Others fall in the gray area between Sections 162 and 263. The final capitalization rules attempt to refine and clarify those gray areas, as well as provide new safe harbors that might make filing your federal tax return less burdensome.

On September 13, 2013, the final regulations (IRS T.D. 9636) debuted, revealing some significant changes from the 2011 temporary version. Here is an overview of the major changes that will affect your privately held firm.

Materials and Supplies
The new regulations generally allow you to deduct materials and supplies that cost $200 or less to acquire or produce under Section 162.

The final regs also permit an optional election to capitalize rotable, temporary or standby emergency spare parts that have been acquired to maintain, repair or improve your property. Most taxpayers would prefer to expense them in the current period, however.

Repairs versus Improvements
When it comes to repairs, the final regulations retain most of the guidance issued under the 2011 temporary regulations. Under Section 162, incidental repairs are expensed.
Under Section 263, however, you must generally capitalize improvements that:

1. Add to the value, or substantially prolong the useful life, of your property or
2. Adapt the property to a new or different use.

Betterment test. The final regs use a modified "betterment" test to determine whether to capitalize costs as improvements. An improvement makes the property better if it materially adds to the asset, restores a major condition or defect, or increases its productivity, efficiency, strength, quality, or output.

An improvement also must be capitalized if it restores the asset by replacing a major component or substantial structural part of the asset, including buildings. The final regs no longer require you to consider how the expenditure is treated on your financial statements when applying the betterment test.

Routine maintenance safe harbor. The final regs also allow routine maintenance on fixed assets -- including routine building maintenance -- to be deducted for tax purposes. Routine maintenance costs are those recurring activities you expect to perform to keep the property in its ordinarily efficient operating condition. Examples include inspection, cleaning, testing and replacing parts.

To qualify as "routine," you must expect, at the time the property was placed in service, to perform the activity more than once during its economic useful life. For building improvements to qualify under the routine maintenance safe harbor, you must expect to perform the activity more than once in 10 years.

De Minimis Safe Harbor for Acquisitions
For simplicity's sake, many business owners prefer to use the same capitalization methods for book and tax purposes. The final regs permit certain taxpayers to deduct tangible property they acquire or produce, if the total cost per item (or invoice) is $5,000 or less. To qualify for this safe harbor, you must:

• Prepare an "applicable financial statement." That is, a certified audited financial statement or a financial statement filed with a state or local government.
• Possess a written accounting procedure at the beginning of the tax year for expensing property under a specified dollar amount.
• Expense the cost on your applicable financial statement, not just your tax return.

The de minimis safe harbor also applies to property with an economic useful life of 12 months or less as long as the item does not cost more than $5,000 per item (or per invoice).

Many private businesses do not prepare "applicable financial statements." You might prepare financial statements in-house or have them compiled by a CPA, for example. Taxpayers without applicable financial statements are subject to a $500 capitalization threshold. Even to qualify for the lesser amount, you must have accounting procedures in place at the beginning of the tax year for expensing property below the threshold, however.

If you elect to use this safe harbor on your tax return, you must use the de minimis safe harbor for all amounts paid in the taxable year for tangible property -- including materials and supplies -- that meet the requirements. You can only revoke an election to use the de minimis safe harbor by filing an application for change in accounting method.

If you do not currently have a written policy for expensing property under a specified dollar amount, consider drafting one before year end, if you plan to elect the de minimis safe harbor in 2014.

Small Business Safe Harbor
The final regs offer a break to small businesses with gross receipts of $10 million (or less) when it comes to building improvements. For buildings that initially cost $1 million or less, qualifying small taxpayers may elect to deduct the lesser of $10,000 or 2 percent of the adjusted basis of the property for repairs, maintenance, improvements and similar activities each year.

You may elect annually to use the safe harbor for buildings on a building-by-building basis by including a statement on your federal tax return. Amounts to which you correctly apply this safe harbor are not treated as capitalizable building improvements under Section 263; instead, they are expensed under Section 162.

Effective Date
The final regulations generally apply to taxable years beginning on or after January 1, 2014. However, certain provisions of the final regs only apply to amounts paid or incurred in taxable years beginning on or after January 1, 2014.

You may apply the new regulations to tax years beginning on or after January 1, 2012. Compliance may require you to change your current capitalization procedures and file an IRS form.

The Next Step
The Repair Regs have been a work-in-progress for many years. The final framework provides much-needed clarity and guidance. But, at more than 200 pages, the final regs are hardly clear and concise. This brief article just scratches the surface of the complex capitalization rules. There are many nuances, exceptions and safe harbors. The IRS expects to publish additional industry-specific guidelines on capitalizing or expensing tangible property for cable networks, natural gas firms and retailers in 2014.

If your business owns or leases fixed assets, consult with your tax adviser to determine how these rules affect your accounting practices -- and whether they will result in tax savings or unexpected costs.

P.S. Don't Forget Expanded Section 179 and Bonus Depreciation Deductions If you are contemplating purchasing or improving a fixed asset in the coming months, you might want to act sooner, rather than later. The American Taxpayer Relief Act (ATRA) provides increased Section 179 and bonus depreciation deductions for qualifying improvements and acquisitions through the end of 2013. Items that can be capitalized under the final regs can be partially or entirely deducted now if you act before year-end. Section 179 allows you to write off up to $500,000 of qualified capital expenditures in 2013, subject to a dollar-for-dollar phaseout once these expenditures exceed $2 million. These amounts are scheduled to go down significantly next year if Congress does not act to retain them. If the phaseout provision limits your Section 179 deduction, you may still be eligible for 50 percent bonus depreciation on qualifying new asset purchases above the $2 million cap. Contact your tax adviser to determine whether Section 179 and/or bonus depreciation make sense for your business.

Important Employer Deadline under the Healthcare Law Is Almost Here

Unless the federal government does a dramatic about-face, the public health insurance exchanges will be up and running October 1 for enrollment in 2014. Many employers are also facing an October 1 deadline that imposes a paperwork burden. By that date under theAffordable Care Act, most employers are required to provide a notice to each employee explaining their options available under the law.

Here are answers to questions employers are asking about the notice requirement.

The Obama administration announced on September 26 that the small business health exchanges, operated by the federal government, will not open for online enrollment until November 1 (rather than October 1). Applications can still be made by mail, phone or fax starting on October 1.

What Information Must Be Included in the Notices?
The written notice must:

1. Inform employees of the existence of the "Health Insurance Marketplace," and include a description of the services it provides and how employees can contact the Marketplace to request assistance.

2. If the employer plan's share of the total allowed cost of benefits provided under the plan is less than 60 percent of such costs, inform the employee that he or she may be eligible for a premium federal tax credit if the employee purchases a qualified health plan through the Marketplace.


2. If the employer plan's share of the total allowed cost of benefits provided under the plan is less than 60 percent of such costs, inform the employee that he or she may be eligible for a premium federal tax credit if the employee purchases a qualified health plan through the Marketplace.

3. Inform the employee that if he or she purchases a qualified health plan through the Marketplace, he or she may lose the employer contribution (if any) to any health benefits plan offered by the employer. In addition, all or a portion of such contribution may be excludable from income for federal income tax purposes.

Which Employers Must Send the Notices?

The notice requirement must be met by employers that are required to comply with the Fair Labor Standards Act (FLSA). In general, the FLSA applies to employers with one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, a test of not less than $500,000 in annual dollar volume of business applies.

The FLSA also specifically covers the following: hospitals; institutions primarily engaged in the care of the sick, the aged, mentally ill, or disabled who reside on the premises; schools for children who are mentally or physically disabled or gifted; preschools, elementary and secondary schools, and institutions of higher education; as well as federal, state and local government agencies.

Is there a Fine if an Employer Doesn't Send the Notices?

According to the Department of Labor (DOL), there is "no fine or penalty under the law" for failing to provide the notices. However, the Affordable Care Act is intertwined with other laws (this particular provision is embedded in the FLSA in a new section, 8A), so it's a good idea to comply to avoid possible legal complications.

Who Should Receive the Notices?

Notices must be given to all employees, whether or not they work full time, and regardless of whether they are currently receiving health benefits. By October 1, you must give these notices to all employees. After October 1, the notices must be given to new hires within two weeks of coming on board.

How Should Employers Send Them?

The notices must "be provided in writing in a manner calculated to be understood by the average employee," the DOL states in Technical Release 2013-02. They can be sent by first-class mail and can also be provided via e-mail, but only if employees access e-mail as an "integral part" of their duties and can access the messages easily.

Is there a Standard Notice Employers Can Use?

The DOL has issued a pair of model notices you can use (but they are not required).

• One is for employers that currently offer health benefits. Here is the link:http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf .
• Another is for employers without plans. Here is the link:http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf .

On Part B of the forms, you will see information employees will need if they plan to purchase coverage on the exchange, assuming they are eligible.

The Part B information is needed by employees who apply to their state's exchange (or the federal version, if no state-run exchange exists). They must complete a required questionnaire to determine their eligibility.
On Part B of the model notice for employers that do currently offer health coverage, there are several blank spaces requesting information about the health plan. Since the law doesn't actually require you to provide the information, and because some of the information may be hard to dig up, some legal advisors say that employers may decide to disregard some or all of Part B, especially if the information is uncertain or likely to change.

Can another Party Send the Notices on Behalf of an Employer?
The DOL stated on its website that an employer can satisfy its obligation to provide notices if another party, such as a third-party administrator or multi-employer plan, sends out notices on its behalf.

Do You Satisfy the "Bronze Standard?"
One question in Part B asks whether your organization provides health benefits that meet the ACA's minimum value test. In other words, does your plan lives up to the standard for a bronze plan? This information is also essential for determining whether you are "playing" or will instead need to "pay" when the delayed requirement takes effect in 2015. It also determines whether employees are eligible to get coverage through the exchange.
In May, the Department of Health and Human Services issued proposed regulations (not yet finalized, but the best guidance available so far) on the subject. Individual states may set some standards of their own.
Here are three safe harbors:

• A plan with a $3,500 integrated medical and drug deductible, 80 percent plan cost sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing.
• A plan with a $4,500 integrated medical and drug deductible, 70 percent plan cost sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA.
• A plan with a $3,500 medical deductible, $0 drug deductible, 60 percent plan medical expense cost-sharing, 75 percent plan drug cost-sharing, a $6,400 maximum out-of-pocket limit, and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75 percent coinsurance for specialty drugs.

Possible Employee Public Relations Opportunity

If it turns out the plan your organization is already offering exceeds the bronze standard (making it a silver, gold, or platinum plan), consider informing employees to help them appreciate the benefit they're receiving. Taking advantage of this employee public relations opportunity can counter any lingering doubts or speculation by some employees about the coverage you are offering them.

Keys to Attracting and Retaining Talented Workers

Who was the highest-paid executive at a U.S. public company last year? Software giant Oracle paid its CEO, Larry Ellison, $96.2 million last year in cash, benefits and stock options, according to its proxy statement.

That might seem like a hefty price tag for C-level talent, but many public companies pay out multi-million dollar compensation packages to attract and retain key executives. In addition, they often provide lavish perks.

New Reports: Job Market Is Rebounding Recent sources of hiring data suggest that the job market is starting to turn around. AICPA Survey: A growing number of companies plan to hire new employees in the next 12 months, according to the third quarter Business & Industry Economic Survey recently released by the AICPA. Companies have improved outlooks for revenues and profits, which translates into higher spending on hiring, capital investments, information technology, training and development. However, the AICPA survey found that financial pros are cautiously optimistic about the future. Their optimism is tempered by three concerns: Regulatory changes (such as healthcare and tax reform), Domestic economic conditions, and Employee and benefits costs. Manpower: A recent Manpower survey supports the AICPA's findings about increased employer optimism. Manpower discovered that 18 percent of employers expect to add workers in the fourth quarter of 2013, according to seasonally adjusted data. This represents the highest percentage of employers projecting a fourth quarter increase since 2007. DOL Data: The Department of Labor reports similar findings. In July 2013, job openings in the U.S. fell to their lowest level in six months. The reasons? Hiring and payrolls are up while firing is down. The jobless rate was 7.3 percent in August, its lowest level since December 2008. Hiring Tips If you're among the employers that plan to hire new workers in the coming months, here are a few considerations: Downplay first impressions. Don't make hiring decisions based on gut feelings or what happens in the first minutes of an interview. Measure performance first, then personality. First determine if a candidate can do the work. Then determine if you like him or her. Clarify success. Before you begin the hiring process, define specifically what superior performance is for that job. Clarify what the candidate must do to succeed in the job, not what experience or skills the candidate must have. Then, you can begin looking for superior people. Think beyond traditional recruiting.The response rate to newspaper ads is declining. To maximize the number of qualified applicants for job openings, consider social media, Internet hiring sites and radio ads -- or put up notices for entry level positions at business school campuses. Market your job. Think of candidates as customers.

How Does Your Package Measure Up?

Your employees may feel undercompensated and overworked when they hear about highly paid executives. They're not alone. A Gallup poll conducted in August 2013 reports that:

• 31 percent of U.S. workers are dissatisfied with the money they earn;
• 40 percent are dissatisfied with their health insurance benefits; and
• 15 percent are dissatisfied with the amount of work their employers require.

As the labor market heats up (see right-hand box), it's a good time to assess whether employees are satisfied with what you're offering in terms of:

• Salaries, wages, overtime and bonuses;
• Vacation, sick and holiday time;
• Medical, dental and vision benefits;
• Life and disability insurance coverage;
• Retirement plans;
• Wellness benefits, such as reimbursement for health club dues; and
• Other perks, such as discounted stock, company vehicles and corporate discounts.

Research how other companies in your area and industry compensate their workers. If it seems like you're offering too little (or too much), consider revising your compensation package. Also, survey your employees to see which benefits and perks they value most. You might be surprised by the results.

For example, after surveying employees about benefits and perks, one large insurance company discovered that workers valued free daily lunches from local restaurants above other more expensive perks, such as commuter benefits, an annual holiday party and Friday afternoons off during the summer. From the employer's perspective, a bonus from free lunches is that employees are more productive, because they don't leave their desks and often collaborate over meals. As a result of surveying employees, the insurer eliminated summer hours to save money but kept its free lunches to maintain morale.

There is no universal compensation package that works best for all companies. The "best fit" for your business depends on demographics, such as geographic location, income levels and average age of employees.

Don't Fear Change

If you modify your compensation package, expect some initial resistance. People don't typically like change, especially if they feel like something's being taken away. But sometimes you need to rethink conventional ways of doing business.

For example, some high-end restaurants in major cities no longer accept gratuities from customers. Instead, they've built tips into their menu prices and they pay wait staff a higher fixed salary. Initially, many people scoffed at the change, arguing that customer service would suffer without tips.

But restaurateurs who adopted a "no-tip" policy -- a practice common in other countries -- found that when servers are less concerned about money, they're more focused on doing a good job. There are also fewer spats about how to divvy up tips among servers and support staff. Of course, customers are happy to forego the post-meal mathematics, too.

Change is often necessary to remain competitive. If you continue to offer mediocre compensation because you're afraid to rock the boat, employees could seek greener pastures. Weak compensation packages also make it harder to attract new talent as companies ramp up their hiring efforts.

Money Alone Doesn't Buy Happiness

Compensation packages aren't the only means of attracting and retaining talent. Many employees are motivated by qualitative factors, such as challenging assignments and the opportunity to contribute.

These can be hard motivators to measure, because you can't put a price tag on them. Here are some ways to help employees feel enriched and empowered:

Give them a voice. Some of the best ideas come from frontline workers. Put out a suggestion box or set up an online system for submitting ideas. Survey workers about proposed changes to policies and procedures. Create think tanks to brainstorm more efficient workflow. Above all, listen and implement feedback whenever possible.

Provide opportunities to try something new. No one wants to do the same tasks, day after day, year after year. Allow employees to rotate duties. Invest in training and continuing education. Expand or modify daily responsibilities. If you don't allow employees to change it up, they may get bored or burnt out.

Share what's in the pipeline. Surprises and rumors make employees edgy. As much as possible, communicate how the company is doing and where it's heading.

Create a sense of real or perceived ownership. Tie bonuses to personal, department and company performance. Or consider offering stock options or discounted stock purchase plans for employees. As the value of the company climbs, so does the value of these benefits. When employees feel their input is valued, they want to make a difference in your organization.

An Overall Competitive Environment

Your ability to attract and retain the best and brightest employees can make or break your business. While few businesses are in a position to offer multi-million dollar compensation packages, yours needs to be competitive. And your work environment needs to foster personal development and enrichment -- attributes employees often value more than cash and other perks.