In most cases the Final Regulations don’t change the general rules for deducting materials and supplies. The Final Regulations merely incorporate preexisting precedents regarding the definition and treatment of materials and supplies and add safe harbors to provide you with additional certainty in applying the rules. The Final Regulations also provide for the treatment of alternative elections and special methods for those using rotable, temporary or stand-by emergency spare parts.
Materials and supplies are tangible, non-inventory property
Materials and supplies are tangible, non-inventory property used and consumed in your operations including costs of components required to maintain, impair or improve tangible property owned, leased or serviced by you and that’s not acquired as part of a larger item of tangible property, or costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less beginning when used in operations, or costs of tangible property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations, or cost of tangible property that as an acquisition cost or production cost of $200.00 or less. The property need only fit into one of the categories to qualify as a material or supply.
Incidental and non-incidental materials and supplies Repair Regulations
The rules for incidental and non-incidental materials and supplies have not changed from prior law. If the materials and supplies are of minor or secondary importance, carried on hand without keeping a record of consumption, and where no beginning and ending inventories are recorded, they are incidental materials and supplies. You may deduct them in the taxable year unless the amounts are paid or incurred. Providing taxable income is clearly reflected.
Materials and supplies are not incidental
If the materials and supplies are not incidental, then you deduct the materials and supply cost in the taxable year in which the materials and supplies are first used or consumed in your operations. However, an otherwise deductible material or supply cost could be subject to capitalization under Section 263(a) if you use the material and supply to improve property, or under Section 263A, if the materials and supplies comprise the direct or allocable indirect cost of manufacturing, constructing, or building other property or acquiring property for resale.
de minimus safe harbor for Tangible Property Regulations
Remember, if you elect to use the de minimus safe harbor and any materials and supplies qualify for safe harbor, you must deduct amounts paid for them under the safe harbor in the taxable year the amounts are paid or incurred that the election covers. Such amounts are not treated as amounts paid for materials and supplies. Because the Final Regulations governing the treatment of materials and supplies are based primarily on prior law, many taxpayers who were previously in compliance with the Rules generally will still be in compliance. Thus generally no action will be required to continue to apply these rules on a perspective basis. Taxpayers who were not in compliance and who need to change their accounting methods to apply the materials and supply rules in the Final Tangible Regulations generally may apply these rules on a perspective basis beginning with amounts paid on or after January 1, 2014. For taxpayers that want to change their method of accounting for materials and supplies in later years, the method change procedures will be discussed later in this webinar.