Final Repair Regs Bring Some Holiday Cheer, But Don’t Expect Midmarket CFOs to be Jolly

New York — Middle-market firms seeking to optimize their 2014 cash flows may have reason for some extra holiday cheer this season, compliments of the IRS and U.S. Treasury Department.

The release earlier this fall of final repair regulations is expected to help businesses better distinguish between currently deductible repair and maintenance expenses and expenditures that must be capitalized.

So why the extra holiday cheer?

George Manousos, a partner inside PwC’s Washington, D.C., office, says that the new regulations have moved the ball down the field when it comes to bringing clarity to such expenses.

He refers to the regulations as “taxpayer friendly.” Still, he cautions that when it comes to repair and maintenance expenses, the goal of clarity remains elusive.

“To put it in football terms, we’ve gone from one 40-yard line to the other 40-yard line,” explains Manousos, who says that the final regulations contain a number of safe harbors and optional elections that may be of keen interest to middle-market taxpayers, and especially those that are seeking to simplify implementation of the rules.

Meanwhile, the tax rule in the final regs makes it easier for firms to follow their book capitalization policy as long as their book policy is $5,000 or less. Many middle-market firms are expected to use this safe harbor.

Gregg Muresan, a partner from PwC’s Private Company Services practice, says that the expectation that tax reforms are coming (and presumably lower taxes for businesses) should be an incentive for certain firms to move beyond the “book methodology” of tax accounting that tends to be simpler but affords fewer deductions.

“Companies that have traditionally followed book, although it’s administratively easier, may want to take a closer look because they may be able to get some permanent tax savings by accelerating deductions into these higher tax rate years,” explains Muresan, who says that the timing of the final regulations may not have pleased certain middle-market CFOs.

Says Muresan: “A lot of our clients just got out of the compliance season, and these final regs come out. So they were sort of just coming up for a breath.”

Asked what, if anything, middle-market CFOs may want to act upon in relation to the regulations before year-end, Muresan recommends that CFOs consider putting in place a capitalization policy that will allow their firm to be eligible for the safe harbors accessible under the new regulations.

“If a business can get a current deduction for costs as opposed to depreciating them over 39 years, they will absolutely want to take the current deduction for costs,” says Manousos, who had a hand in the project that initiated the reform effort and led to the “final regs” while he was working for the U.S. Treasury in 2006.

“It’s a very factual area — whether or not a repair increases the life of property or whether it materially adds value to the property — and that was the whole reason why this project originated,” he explains.