Saving under new IRS regs

The IRS’ new Tangible Property Regulations consist of a number of intricate accounting rules and changes that taxpayers will face during this tax season and beyond.

Last week we discussed the regulations and who may be covered under them. This week we’ll discuss compliance issues and savings opportunities in more detail.

Below is checklist to discuss with your accountant.

Does your company:

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n Acquire numerous small-dollar items of tangible property? A safe-harbor election provides the ability to deduct individual items below a specified dollar threshold. To take advantage of this safe harbor, a capitalization accounting policy must be in place at the beginning of the tax year.

n Incur costs related to materials and supplies? The regulations provide that eligible materials and supplies are deductible under the de minimis safe harbor.

n Incur significant repair and maintenance costs for a building or heavy machinery? You may be able to use the routine maintenance safe harbor to increase current deductions, or deduct them with more certainty.

n Own property that has incurred significant costs for renovations during the past 15 years? Replaced components can be deducted and new expenditures should be appropriately expensed or capitalized.

n Own a building, leasehold improvements or land improvements? If you replaced a part of your building structure or any improvements in the current year (or in prior years), a partial disposition election may be of benefit.

n Own a building with a basis of less than $1 million and have annual gross receipts of less than $10 million? It is important to evaluate the safe harbor for small taxpayers whereby you may be able to deduct, rather than capitalize, certain improvement costs. This may prove beneficial when the property is disposed since it may reduce the portion of the gain taxed at a higher rate.

Small taxpayers are exempt from Tangible Property Regulation compliance, but there are good reasons they may want to comply.

The IRS released Revenue Procedure 2015-20 on Feb. 13. This new Revenue Procedure provides small taxpayers an exemption to comply with the new Tangible Property Regulations for 2014. Small taxpayers are defined as those with total assets of less than $10 million or having average annual gross receipts of $10 million or less for the prior three taxable years.

Filing the forms may protect small companies and provide them with an opportunity to still qualify for the related deductions.

Important points:

n Revenue Procedure 2015-20 only addresses the issues associated with the implementation of the Tangible Property Regulations and only for taxpayers that qualify under the new Revenue Procedure.

n If you are a small taxpayer and elect not to file the appropriate Forms 3115s for Revenue Procedure 2015-20, it is likely that your tax preparer may ask for a Statement of Understanding from you. This document will likely cover the facts and consequences of not filing and your clear choice that you chose not to file nonetheless.

n The De Minimis Election should still be included in all returns.

n Form 3115 is still required for those taxpayers over the $10 million threshold and those wishing to take partial dispositions or correct errors. •

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