In this section of TaxBuzz Guides, you'll find a comprehensive overview of how the IRS views repairs and capital improvements made to tangible property, such as a home or a commercial building.

Background: IRC Sec. 263 requires that amounts paid to acquire, produce or improve tangible property must be capitalized and depreciated over its useful life.  However, IRC Sec. 162 allows materials, supplies, and repair and maintenance costs to be expensed. But neither IRC section provided bright line definitions and the IRS frequently found itself embroiled in disagreements with taxpayers.  Wishing to resolve the issue, the IRS has assembled an extensive set of regulations that are intended to clarify the distinction between improvements that must be capitalized and repairs, materials and supplies that can be expensed.    

These regulations became effective for tax years beginning on or after January 1, 2014, but optionally allowed taxpayers to retroactively apply the regulations to tax years beginning on or after January 1, 2012 (Ann. 2013-7). This opportunity has expired.

Subsequently the IRS issued Rev. Proc. 2015-20 providing simplified filing for small businesses and allowed them to apply the regulations prospectively but giving up retroactive audit protection and the ability to make retroactive adjustments based on the new regulations. Those taxpayers adopting the simplified method are permitted to make certain tangible property changes without filing a Form 3115 (used to make accounting method changes) but give up Sec 481(a) adjustments for the prior years (Sec 5 of Rev. Proc. 2015-20).

The regulations are a set of rules that apply in different circumstances and include a number of safe harbors.