The IRS’ recently released Tangible Property Regulations – the most dramatic change to tax law in nearly 30 years – contain many new compliance requirements and opportunities for tax savings.
The regulations are complex and difficult to comply with. Your particular business situation will need to be analyzed to determine the proper treatment of almost all business expenditures.
In this column we’ll focus on the new regulations. Next week we’ll discuss compliance issues and savings opportunities in more detail.
The tangible property regulations 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). Nonprofit organizations and some trusts may also be affected.
Small taxpayers (defined as having total assets of less than $10 million as of Jan. 1, 2014, or average annual gross receipts of $10 million or less for the prior three taxable years) should be aware that they may be exempt from compliance with the new Tangible Property Regulations.
Small businesses must still implement the regulations and therefore it may still be in their best interest to comply and file the necessary forms unless they have immaterial fixed assets.
Taxpayers are required to comply with the final Tangible Property Regulations starting with taxable years beginning on or after Jan. 1, 2014.
Most taxpayers will need to consider modifying internal processes to be in compliance. Additionally, most taxpayers will be required to file one or more forms for an Application for Change in Accounting Method (Form 3115) to properly institute the changes. Not only will these taxpayers be required to file one or more Form(s) 3115 for each accounting method change, but also the Form 3115 filing is required for each separate entity, trade or business.
Under the Tangible Property Regulations, 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 minimis amounts.
The following list contains typical potential write-off opportunities:
n 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.
n Prior leasehold improvements or portions thereof.
n Previously capitalized improvements now considered deductible “repairs” in the viewpoint of the new regulations.
Historically, when a taxpayer replaced a significant component of an asset – such as the roof of a building, an elevator, an HVAC unit, etc. – the taxpayer had to continue to depreciate the old asset and the replacement.
Under the final Tangible Property Regulations, taxpayers can now make a partial disposition election to write off the undepreciated cost basis allocable to the replaced component, presuming the cost of the replacement component is capitalized. Taxpayers that disposed of a significant portion of an asset in previous years can make a late partial disposition election via an automatic accounting method change to recover the undepreciated basis.
The availability of the late partial disposition election can generate big potential write-offs (hence tax savings) for businesses with real estate. However, the late partial disposition election is only available for taxable years beginning before Jan. 1, 2015. •
