The interaction between sec. 179 and the repair regs.

• Author: Sellner, Mark A.

There is an overlap between Sec. 179 expensing and the materials and supplies and de minimis safe-harbor rules in the repair regulations. However, neither the preamble to the repair regulations in T.D. 9636 nor the preamble to the disposition regulations in T.D. 9689 includes any substantive discussion of the overlap.

CPAs with middle-market clients struggled over the past couple of years with the repair regulations more than with any other tax issue in recent memory. Given the opportunity to expense property under Sec. 179, was the time and effort devoted to the repair regulations worth it?

That depends. If a taxpayer's capital expenditures fall within the Sec. 179 dollar limitations, the repair regulations add no incremental tax benefit. However, Sec. 179 is a perennial component of last-minute extenders legislation, and for tax years beginning after 2014, the limitation is set at only $25,000. The limitation may once again be increased to the $500,000 threshold sometime during or for the 2015 tax year, but with the push in Congress for comprehensive tax reform, that outcome may be less likely than in past years. In contrast, the repair regulations have been finalized as of Jan. 1, 2014, and now are a permanent part of the tax landscape. So, for now, the safe harbors and de minimis rules can be counted on to provide additional expensing options.

Sec. 179 and the repair regulations both apply to materials and supplies and property covered by the de minimis safe-harbor election.

First, the repair regulations permit expenses for materials and supplies for items costing up to $200 to be deducted (Regs. Sec. 1.162-3(a)(1)).This expensing of materials and supplies provides a tax deduction, which is in addition to any amounts expensed under Sec. 179. Thus, the dollar limitation of Sec. 179 is not allocable to this property and can be used against property for which a deduction under Regs. Sec. 1.162-3 is otherwise unavailable, potentially providing a larger overall deduction than either Sec. 179 or the repair regulations would allow separately.

Second, the de minimis safe harbor of $500 (for taxpayers without applicable financial statements) or $5,000 (for taxpayers with applicable financial statements) per item in the repair regulations also will preserve the Sec. 179 dollar limitation, but at the cost of a book net income charge (Regs. Sec. 1.263(a)1(f)). The de minimis safe harbor requires book/tax conformity, while Sec. 179 does not.

...