The De Minimis and Routine Maintenance Safe Harbors
compared to the de minimis election , but the scope of eligible maintenance costs that can be expensed is significantly broader .
The term “ routine maintenance ” refers to costs incurred on a unit of tangible property or a building that are deemed not to improve that unit of property or building .
To apply this safe harbor , assuming it deviates from how the taxpayer has been accounting for such costs , the taxpayer will need to file a request for an accounting method change via Form 3115 , Application for Change in Accounting Method , with designated change number 184 . This is an automatic method change , so completing Form 3115 is relatively straightforward .
Also , this is a one-time election that will apply to all subsequent years unless the taxpayer later decides to request another method change , unlike the de minimis election , which is an annual election and binding only for the tax year made .
Under the safe harbor for routine maintenance , the amounts incurred can be expensed if the purpose for incurring the expense is related to an ongoing activity to keep the unit of property or building structure or building system at or close to the taxpayer did not perform the maintenance more than once during the class life of the unit of property or building structure or system . The expectation would still be considered reasonable , provided the taxpayer can substantiate that , when the property or building structure or system was placed in service , it was reasonable to expect to perform maintenance more than once during its class life .
Sec . 168 ( e ) provides a table that indicates the class life for each category of property when determining the depreciable life for tax purposes . Secs . 168 ( g )( 2 ) and 168 ( g )( 3 )( B ) go further into detail about the class life to be used when determining the “ routine activity performed more than once during its class life ” criteria . Sec . 168 also details other specific class lives for qualified improvement property , qualified technological equipment , automobiles , and certain real property that should be reviewed when applying this election .
Regs . Secs . 1.263 ( a ) -3 ( i )( 1 )( i ) and ( ii ) also identify key factors in determining whether the maintenance is routine and reasonable . According to these regulation sections , the taxpayer should consider the recurring nature of the activity ,
These two essential safe harbors offer distinct approaches in addressing this dilemma and will help taxpayers navigate the complex maze of the repair regulations .
its original or efficient operating condition . The expense cannot improve the unit of property or building structure or system .
Keep in mind that part of this requirement is that the wear and tear of the unit of property or building structure or system results from the taxpayer ’ s using it for its intended purpose . Expenses incurred related to scheduled maintenance shortly after the unit of property or building structure or system is purchased and / or placed into service would thus not qualify .
‘ Routine ’ Aspect of Expense What does it mean for an activity to be “ routine ” in nature ? This can be open to interpretation . Regs . Sec . 1.263 ( a ) - 3 ( i )( 1 ) ( ii ) provides an explanation as to what is routine in nature as well as some examples , which are not all inclusive . Routine maintenance may be performed at any time during the class life of the unit of property or building structure or system ( discussed below ). However , the activities are routine only if , at the time the taxpayer places the unit of property or building structure or system into service , the taxpayer reasonably expects to perform the routine activity more than once during its class life .
There is no clear answer as to what a routine expense is , but the regulations provide some examples and explanations regarding the requirement : The inspection , cleaning or testing of the unit of property or building structure or system and / or the replacement of damaged or worn parts of the unit of property or building structure or system with comparable and commercially available replacement parts are all types of expenses that do not ultimately improve the unit of property or building structure or building system and therefore qualify as routine maintenance eligible to be expensed . Besides the examples provided in the regulations , other costs can be expensed , depending on a client ’ s specific circumstances . A taxpayer ’ s expectation of performing the routine maintenance will not be deemed unreasonable simply because industry practice , the manufacturer ’ s recommendations , and the taxpayer ’ s experience and history with similar or identical property .
Examples of Routine Maintenance Regs . Sec . 1.263 ( a ) -3 ( i )( 6 ) provides several examples that clarify the application of the safe harbor for routine maintenance . Example 1 provides a great illustration of how certain costs required by the manufacturer or a governing agency can be expensed if the item is a recurring one , does not improve the unit of property , and is within the class life of that unit of property .
Regs . Sec . 1.263 ( a ) -3 ( k )( 6 ) addresses the replacement of a major component or a substantial structural part of a unit of property . This type of expense can qualify for the routine maintenance safe harbor if the unit of property has not deteriorated to an unusable condition and the replacement is part of routine maintenance and recurs more than once during its class life . However , if the unit of property is being restored and thus improved , the taxpayer must capitalize the replacement ’ s cost .
A major component is a part or combination of parts that perform a discrete and critical function in the operation of the unit of property ( Regs . Sec . 1.263 ( a ) -3 ( k )( 6 )( i )( A )). A substantial structural part is defined as a part , or combination of parts , that comprises a large portion of the physical structure of the unit of property , a definition that is open to interpretation ( Regs . Sec . 1.263 ( a ) -3 ( k )( 6 )( i )( B ).
Examples 25 , 26 , and 27 under subparagraph ( 7 ) in this regulation provide valuable illustrations of how these rules operate with respect to replacing windows on a building . This may be helpful to taxpayers who own residential or commercial buildings , and the concept can be applied to other aspects of the building structure or its systems .
14 CALIFORNIA CPA OCTOBER 2024 www . calcpa . org