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Taxpayers Required to Comply with New Tangible Property Regulations for 2014 Filing Season


11/4/14

Take Advantage of Taxpayer Friendly Provisions

Dear Clients:

We are writing to once again notify you of an important change in the tax law that affects all for-profit business taxpayers (including individuals with rental property or Schedule C).

The IRS has issued long-awaited final Tangible Property Regulations (TPRs) dealing with the tax treatment of amounts paid to acquire, produce, or improve tangible property, which is defined as both real and personal property. 

  • Real property is land and improvements such as buildings or other permanent structures.
  • Personal property includes all property (other than real property) which is contained in or attached to a building such as machinery, furniture and equipment.
     

Taxpayers will need to apply these regulations to determine whether they can deduct expenditures as repairs and maintenance or must capitalize and depreciate them over IRS mandated asset lives.

Complying with the TPRs will be burdensome; however, the TPRs also provide a silver lining in that they may create opportunities for taxpayers to take tax deductions for amounts previously capitalized that may now be expensed. There may also be an opportunity to write off the unadjusted basis of replaced building systems and components (i.e. elevators, HVAC systems, roofs, etc.) that were not previously written off when the replacement was installed and capitalized.
The TPRs take effect for tax years beginning on or after January 1, 2014. As such, taxpayers will need to be in compliance with the TPRs with the filing of their 2014 Federal income tax returns.

Generally, the TPRs. are applied on a retroactive basis for as long as the property has been owned or for as long as records are maintained on said property. This means taxpayers will need to review prior years repair and maintenance costs and capitalization decisions to determine if costs were treated in accordance with the TPRs. Any adjustments for tax years prior to 2014 (i.e., a repair that should have been capitalized and depreciated, and still has a depreciable basis in 2014 or a cost that was capitalized rather than expensed), will need to be adjusted with the filing of a Form 3115 (Accounting Method Change). Even if there are no prior year adjustments, a Form 3115 is required to be filed to acknowledge compliance with the TPRs.

The IRS has indicated that many taxpayers will have to file one or more Form 3115’s to adopt the TPRs. Some good news is that taxpayers can file certain multiple accounting method changes on one Form 3115. In addition, because the regulations mandate that the TPR changes are deemed to be automatic changes of an accounting method, no prior approval from the IRS is needed. Rather, Form 3115 electing these changes is merely attached to a taxpayer’s 2014 Federal income tax return.

Included in the TPRs are many provisions that are taxpayer friendly, such as the “de minimis” safe harbor election that allows taxpayer’s to deduct certain specified amounts paid for tangible property that are expensed for financial accounting purposes; qualifying small taxpayer’s safe harbor election to deduct up to $10,000 per year of tangible property costs; and a partial disposition election that gives taxpayer’s the ability to take a deduction for disposal of building assets that have been replaced.

The TPRs are lengthy and complex and most taxpayers will have to modify their internal processes to comply with these new rules. Some of these modifications will include documenting capitalization versus expensing policies, and how “non-incidental” material and supplies are treated. 

Navigating and implementing these new rules will not be easy as the law in some cases is unclear or subjective. Each taxpayer’s individual facts and circumstances will need to be analyzed to determine the proper treatment for costs capitalized and treated as repairs and maintenance or materials and supplies.

Please contact your CohnReznick representative to discuss how these new rules affect you on both a business and personal level.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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