Date: December 11, 2014
To: Our Valued B & V Clients
From: Briggs & Veselka Co.
RE: Capturing Tax Opportunities Within the Final Tangible Property Regulation
A. Tangible Property Regulations Overview
The tangible property regulations (TPRs) are the most dramatic changes in tax law to affect businesses since the overhaul of the Internal Revenue Code in 1986. The TPRs apply to all forms of business, whether a “C” corporation, an “S” corporation, a partnership, an LLC, a sole proprietorship (Schedule C on individual return), or a rental (Schedule E on individual return). The facts and circumstances of each business situation should be carefully evaluated to determine the proper treatment of all business expenditures for materials and supplies, repairs and maintenance, and asset purchases along with the impact on subsequent depreciation. Needless to say, these regulations are quite complex and require timely attention.
The regulations were issued by the Department of Treasury (Treasury) on September 19, 2013 and are effective for tax years beginning on or after January 1, 2014.
The regulations impact all taxpayers who acquire, produce, improve, repair or dispose of tangible property and provide a framework for distinguishing currently deductible costs from costs that must be capitalized. The regulations also provide taxpayers the ability to claim a partial disposition of components of personal and real property assets. The new regulations will require impacted taxpayers to make changes to their current accounting methods related to these areas by filing an Application for Change in Accounting Method (Form 3115.) Although the regulations are effective for tax years beginning in 2014, transition rules provide taxpayers the flexibility to adopt the regulations with their 2012, 2013 or 2014 tax returns.
B. Potential Tax Deduction Opportunities
Under the new rules, taxpayers may be able to deduct greater amounts for repair costs, materials and supplies, routine maintenance for buildings and equipment, maintenance on buildings for smaller taxpayers, and new safe harbor de minimus amounts. There are numerous specific rules and qualifications for many of these opportunities.
More importantly, many taxpayers are able to currently deduct the net tax value of certain previously capitalized assets. The following list contains typical potential write-off opportunities:
- Roof or land improvement costs that were previously capitalized may now have their net tax value written off if a roof improvement or new paving is (or was) subsequently made and capitalized.
- Previously capitalized manufacturer or franchisor-required refreshments.
- Prior leasehold improvements of portions thereof.
- Previously capitalized improvements now considered deductible “repairs” in the viewpoint of the new TPRs.
Under the guidance of the temporary TPRs, a taxpayer was required to take this deduction for previously disposed assets. These temporary regulations meant that the taxpayer would lose current and future tax depreciation, or potential write-offs on previously capitalized assets, if these new rules were not implemented and the necessary Form(s) 3115 properly filed under the correct new method(s). Now under the guidance of the final TPRs, this restrictive provision has been removed – taxpayers can now choose to continue to depreciate those previously disposed of assets. Nevertheless, the availability of the late partial disposition election can generate big potential write-offs (hence tax savings) for businesses with real estate.
C. Internal Processes Also Will Have to be Addressed to Deal With Three Main Provisions in the Final TPRs:
- Added incentives for establishment of a capitalization “write-off” policy dictating a certain write-off amount (e.g., “our policy is that we are going to expense all purchases under $1,000”). If this policy is not adopted before the first day of the tax year, taxpayers may be limited to a $200 per item “write-off” policy. The taxpayer is otherwise entitled to write off up to either $5,000 or $500 per item depending on the financial statement criteria met by business.
- Review depreciation schedules to assess assets on the list that may qualify for the write-off described above, and to match that to your best benefit (i.e. tax years 2012 to 2013, or 2014, see discussion below of the appropriate tax year(s)). This effort may require the use of a cost segregation study or other “reasonable methods” in order to arrive at the remaining un-depreciated tax basis that will qualify for a write-off.
- Accounting for “non-incidental” material and supplies now provides that these should be inventoried at tax-year end and not expensed until first used or consumed in the business.
D. Elections and Other Considerations
Six new potential annual elections also are provided under the revised TPRs.
The most common of these elections are:
- The annual choice to employ the new de minimis safe harbor for purchases of tangible materials and supplies and/or asset if the amount per item meets the new rules (either $500 up to $5,000 per item):
- The new safe harbor for small taxpayers to elect not to capitalize improvements or repairs to an eligible building property (limitation the lesser of 2% of the unadjusted basis of the building or $10,000): and
- The new election to dispose of building assets that have been replaced (the partial disposition election).
Under the revised regulations, taxpayers can choose to write off prior building assets without the burden of the general asset account (GAA) veil. For taxpayers that did place buildings into GAAS for 2012 or 2013 tax years the new guidance issued in February provides “relief” by allowing them to file and automatic accounting method change to revoke any late GAA elections made. This ability to revoke the GAA election is only available for tax years beginning on or after January 1, 2012, and beginning before January 1, 2015.
The new tangible property regulations are complex and may be difficult to implement and comply with. The facts and circumstances of each business situation will need to be analyzed to determine the proper treatment of almost all business expenditures for materials and supplies, repairs and maintenance, and asset purchases and their subsequent depreciation. All businesses should elevate the importance and time restrictions in implementing these rules to assure proper compliance with the regulations and the TPRs from which the taxpayer should choose.
We encourage you to contact your B & V tax professional with any questions that you may have on these complex rules and related tasks.
See Attached Tangible Property Checklist by clicking here.
Click here for the PDF version of the memorandum.