The New Cap and Repair Regulations
Client Question: What are the rules regarding the new IRS cap and repair regulations regarding expensing versus capitalizing certain expenditures such as tractor repairs, fencing supplies, etc.?
Michael Flerchinger
Nichols Accounting’s Answer: In the past, the ability to take an immediate deduction for certain expenditures was somewhat liberal. However, the IRS began to take notice and as a result, the Treasury Department has attempted to produce rules that will tighten this flexibility with Treasury Decision 9636. These new rules are commonly referred to as the “Cap and Repair Regs”.
There are two different versions of the regulation
- The temporary cap and repair regulations were issued in 2011. If your operation elected to implement the temporary regulations, those would apply during the time period from 2011-2013, and new regulations would be effective for taxable years beginning January 1, 2014.
- The final cap and repair regulations were issued in September 2013. If your operation did not elect to implement the temporary regulations, the final regulations will apply and are effective for taxable years beginning January 1, 2014.
There are a few areas of the regulation, presented below, that will be more applicable to farming and ranching operations than others, but this response is not all encompassing of the full Cap and Repair Regs.
The first section to be aware of is the safe-harbor rules that provide guidance on whether or not to capitalize or expense a purchase. Operations that do not 
have an audited financial statement can expense purchases that are less than $500*. In order to take advantage of this safe harbor rule your accounting policy must state this and be effective as of January 1, 2014 for a calendar year taxpayer. If a policy is not in place the default threshold drops to $200. The safe harbor is based on a per item basis.
As an example, say you purchased a dozen new round bale feeders for an individual cost per feeder of $450. The total invoice would be $5,400 and could be immediately expensed if your accounting policy was in accordance with the $500 safe harbor rule.
A routine maintenance safe harbor was also created. Under the routine maintenance safe harbor rule an expense is immediately deductible. Maintenance is considered routine if it is expected to occur at least once within the IRS life of the asset and its purpose is to keep the asset in normal, efficient operating condition.
For example, if you have a piece of equipment with an IRS life of 7 years and it is necessary to do an engine overhaul after six years, even though an engine overhaul may be a large expenditure, the cost will be immediately deductible.
It is reasonable to say that fencing supplies purchased for maintenance of a fence as mentioned in the client’s question would be considered deductible immediately. However, if the supplies were purchased as a whole to install a new fence around a pasture, then those costs would have to be capitalized.
The routine maintenance safe harbor is in contrast to the rules regarding improvements to property. If there is an improvement to an asset then the cost of that improvement must be capitalized. Improvements are defined as those costs that result in making the whole asset better, restore it to like new condition, or adapt the asset to a new or different use. An example of an improvement that has to be capitalized is a new replacement engine on a truck that has more power than the original engine it replaces.
Expense: Business expense that is deductible in the current year and is not a capital expenditure.
Capital Expenditure: Generally a cost that produces a benefit, or a new asset that extends beyond the taxable year, or has a useful life substantially beyond one year. An improvement that extends the life of property, or an adaptation that permits the property to be used for a new purpose.
Safe Harbor Rule: a provision that creates an exemption from a regulation.
The topics addressed above only scratch the surface of the new cap and repair regulations. There is much more to the rules that may be applicable to your farm or ranch and should be addressed individually to fit your specific situation, and get the most benefit from them.
To request a template Cap and Repair Reg policy for your operation, please contact clientcare@nicholsaccounting.com.
*An operation with an audited financial statement has a de minimis safe harbor rule to expense any purchase under $5,000. Most farm or ranch operations likely do not have an audited financial statement.
Michael Flerchinger is a CPA with The Nichols Accounting Group located in Oregon and Idaho. They specialize in agribusiness tax planning and consulting. Reader questions can be submitted to taxquestions@nicholsaccounting.com .