Tax exempt organizations should be aware of recently issued temporary regulations that provide guidance on the deductibility of expenditures such as repairs, maintenance, and supplies, and the capitalization of expenditures for fixed assets. These regulations impact every taxable entity that incurs these types of expenditures. Plante Moran is currently evaluating the impact these regulations will have on tax-exempt organizations. Our preliminary analysis suggests that these regulations are most likely to affect organizations that file Form 990-T and deduct repair and depreciation expenses and those that have for-profit subsidiaries that incur such expenses. In the event that these regulations apply to your organization, additional analysis of these expenditures and existing policies for expensing, capitalizing, and depreciating such expenditures will be required and it’s likely that a Form 3115 will be required to be prepared and attached to your organization’s Form 990-T or (for taxable subsidiaries or joint ventures) Form 1120 or 1065.
In general, the regulations are designed to clarify standards for capitalization of specific expenditures associated with tangible property and apply bright-line tests to the new standards. The regulations clarify the definition of a “unit of property” requiring capitalization and offer taxpayers opportunity to possibly expense previously capitalized items. We’ll update you as our analysis progresses and are ready to assist your organization with this process as needed.