Pit & Quarry, June 2013

Tax rule changes New regulations regarding selling acquiring producing or improving business property affects nearly all quarries and sand and gravel plants I n an effort to resolve the controversy over whether certain expenditures made by a crushed stone sand or gravel business are currently deductible as repair expenses or whether they must be capitalized and deducted over the life of the underlying business asset the Internal Revenue Service IRS released temporary repair regulations late in 2011 Because of the many questions raised about the new regulations they are now effective for tax years beginning after Jan 1 2014 rather than after Jan 1 of this year as originally intended Naturally these are an option for the 2013 tax year The new IRS regulations on the treatment of expenditures incurred in selling acquiring producing or improving business property will affect nearly all quarries sand and gravel plants and aggregates producers The repair regulations not only explain how to distinguish a current deductible repair from a capital expense but also include guidance related to depreciation under the standard Modified Accelerated Cost Recovery System MACRS In addition to clarifying and expanding the current rules the new regulations The repair regulations include guidance related to depreciation under the standard Modified Accelerated Cost Recovery System MACRS create so called bright line tests for applying the repair or capitalize standards provide guidance related to accounting for and disposing of repaired property as well as clarifying other aspects of the complex repair capitalize dilemma Capitalize or repair expense Since the Reconstruction Era Income Tax Act of 1870 taxpayers have been prohibited from deducting amounts paid for new buildings permanent improvements or betterments made to increase the value of property While this concept has been recognized as part of U S tax law almost from its inception exactly what must be capitalized and what may be currently deducted as an expense has been at issue ever since According to the IRS expenditures are currently deductible as a repair expense if they are incidental in nature and neither materially add to the value of the property nor appreciably prolong its useful life Expenditures are also currently deductible if they are for materials and supplies consumed during the year On the other hand expenses must be capitalized and written off over a number of years if they are for permanent improvements or betterments that increase the value of the property restore its value or use substantially prolong its useful life or adapt it to a new or different use Frequently new additions are made to already existing property These additions are not replacement components nor are they repairs to property Instead they are newly installed components Because they are considered to be additions these expenditures are required to be capitalized At other times replacement parts or components are merely added to business property For example a vehicles engine is worn out and replaced This replacement returns the vehicle back to its condition prior to the deterioration of the part It would be logical to consider this replacement as an increase in the vehicles value requiring capitalization Conversely it would also make sense to say that by returning the vehicle back to its prior condition that it had been repaired Under this theory all repairs would be deductible no matter how substantial they might be This interpretation renders meaningless any distinction between a deductible business expense and a capital expenditure Thus it is oftentimes insufficient to merely look at increased value as the determining factor for character BUSINESS BY MARK E BAT TERSBY 48 PIT QUARRY June 2013 www pitandquarry com