In our last few articles we’ve been looking at the new IRS regulations on how to classify repairs and improvements for tax purposes. The voluminous regulations contain some things that are pretty good for owners of residential rentals and commercial properties, and some things that aren’t so good.
Among the good things is a safe harbor for materials and supplies. An expense for any property that comes within this safe harbor may be currently deducted.
Exactly what are materials and supplies?
Materials and supplies are tangible property items other than inventory for sale to customers. There are five types:
- property that that cost $200 or less to acquire or produce;
- component parts acquired to maintain or repair tangible property;
- property with an economic useful life of 12 months or less — for example, stationary and cleaning supplies;
- fuel, lubricants, water and similar items that are reasonably expected to be consumed in 12 months or less; and
- any other property identified in IRS guidance as a material and supply. (IRS Reg. 1.162-3(c).
The most important of these categories for most smaller taxpayers is for property that cost less than $200 (the original version of the regulations had a $100 limit, but this was doubled in the final regulations). You may currently deduct all such items, no matter how many you buy or how they are used. Thus, for example, if a real estate broker buys 10 cell phones that each cost $150, she may currently deduct all 10 as materials and supplies in the year she puts them into service in her business.
Items that cost more than $200 may be deducted as materials and supplies if used to maintain or repair existing property — in other words, they are spare or replacement parts. However, if such items are used to improve property — make it better than it was before — they are not deductible unless they fall within a special de minimis safe harbor we’ll discuss in next week’s column.
Example: Landlord pays to acquire, deliver and install a new window to replace a broken window in an apartment building he owns. The new window is a material or supply because it is a component acquired and used to repair a “unit of property” (the apartment building).
It is not an improvement because the new window does not make the building better than it was before the old window was broken. The cost to acquire and deliver the window is deductible as a material and supply (assuming no gain or loss is recognized on the broken window). (IRS Reg. § 1.162-3T(h), Example 5).
Installation costs are not treated as part of the cost of materials and supplies. But they are generally deductible as repair expenses.
How do you take the deduction?
Unlike the case with some other safe harbors under the IRS regs, there is no need to file an election to take this deduction, or have a specific type of financial statement or written accounting policy in place. You simply deduct the cost of such items as a business expense on your tax return the year you put them into service. Be sure to keep track of all such expenses.
Stephen Fishman is a tax expert, attorney, and author who has published 20 books, including “The Real Estate Agent’s Tax Deduction Guide,” “Working for Yourself,” “Deduct It!,” and “Working with Independent Contractors.” His website can be found at fishmanlawandtaxfiles.com.