The Various Buckets of Depreciation: A Review of Current Rules & Changes

Tax depreciation rules can be complex, but developing a better understanding of them can yield significant tax savings for contractors.

This article provides an overview of current depreciation rules as well as recent changes that both increase options to accelerate depreciation deductions and phase out some favorable opportunities.

Repair Regulations

The first step in this process is to minimize capital assets by expensing all items now permissible under the recent repair regulations.

In 2013, the IRS released final regulations for tangible property costs (equipment, property, and other fixed assets), commonly known as the “repair regs.”1 Generally, the IRS requires most tangible property costs be capitalized and depreciated over several years rather than deducting the full amount in the current year.

The repair regs provide the opportunity to immediately deduct certain items that would have previously been capitalized, like small tools and supplies, up to $2,500.2 Companies with an applicable financial statement (AFS) for the year – that is, an audited statement or a statement required to be submitted to a federal or state agency – can deduct up to $5,000.3

However, contractors that either do not have an annual financial statement or receive an annual reviewed or compiled statement would be at the lower threshold of $2,500 unless they submit the statement to an agency, such as for prequalification with a state Department of Transportation. Contractors must establish appropriate capitalization and expensing policies in accordance with these regulatory changes. (Refer to “Repairs or Improvements? New IRS Rules on Tangible Property” by Jonathan D. Olson and John W. Dorn in the May/ June 2012 issue.)

Rather than capitalizing assets that can be expensed, contractors can capably “leave room” for more assets to fit into the other buckets of depreciation, as we will shortly see.

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