The IRS issued the final tangible property regulations on September 13, 2013, modifying and superseding the temporary regulations that were issued on December 23, 2011. The tangible property regulations will apply to all taxpayers. It does not matter what form of business one is in, 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); these new rules and requirements will apply. Taxpayers will be required to file one or more Form(s) 3115 for each accounting method change for each separate entity, or trade or business.
These regulations are effective for tax years beginning on or after January 1, 2014. In order to comply with this new law, there are actions taxpayers must take now:
- Establish or revise a written policy no later than January 1, 2014 to expense certain "de minimis" expenditures under the safe harbor rule. The final regulations allow taxpayers with an Applicable Financial Statement (AFS) to expense property that would otherwise be required to be capitalized if $5,000 or less per invoice, or per item as substantiated by the invoice. In general, an AFS is an audited financial statement. It does not include a review or compilation. Taxpayers without an AFS may only expense property of $500 or less per invoice, or per item as substantiated by the invoice. In either case, the taxpayer must have the written policy in place at the beginning of the tax year when the change in accounting method is to be adopted (tax years beginning 1/1/14 or later) to use this safe harbor expense opportunity. If the policy is not in place by 1/1/14 or if the taxpayer does not follow this policy for book purposes, these expenses may not be allowed for tax purposes. The policy should be written in the form that you intend to actually apply it. For example, if you desire to expense all items $5,000 or less except for computers, draft the policy accordingly to except computers from the policy.
- Review your fixed asset records to identify any assets that have previously been "improved" and that have a remaining net tax value. The new law allows for the net tax value of assets to be written off when the asset has been improved. If there is significant benefit a taxpayer should consider identifying and writing off the net tax value and file for a change in accounting method rather than continuing to depreciate the asset.
- Review your fixed asset records to identify any assets that have previously been capitalized that are not required to be capitalized using the rules under the final regulations. The new law provides guidance on when to capitalize expenditures. If an expenditure was previously capitalized but under the final regulations would not be required to be capitalized, currently expense the item if the expenditure was incurred in the current tax year or consider a method change if for a prior year. This review should include not only fixed asset additions, but also repairs and maintenance expenditures and expenditures falling under the safe harbor for routine maintenance.
- Review your fixed asset records to identify any assets that have previously been depreciated using an incorrect life or method. If during the review of your fixed asset records you identify assets that have been depreciated using an incorrect life or method, consider filing for a change in accounting method to correct this error. If such an error is identified while under IRS examination the possibility exists that some amount of depreciation expense may permanently be disallowed.
- Establish a process to segregate on a prospective basis each newly added building system (HVAC, plumbing, etc.) and the components of the building structure likely to be improved prior to their complete depreciation (e.g., roof) into separate assets in your depreciation system to allow for ease in recognition of the net tax value of assets later "improved". The new law allows for the net tax value of assets deemed improved to be written off at the time of the improvement. Segregating the assets when they are placed in service should promote ease in compliance with the tax law when the asset is later improved.
While many of the changes required by the regulations will not be reflected until the 2014 tax returns are filed, starting now with the implementation of the new requirements is critical. For example, if a written policy is not in place at the beginning of the 2014 tax year the taxpayer will not be able to take advantage of the safe harbor rule for expensing expenditures that otherwise are required to be capitalized.
The rules are complicated and in many cases not clear. The facts and circumstances of each business situation will need to be analyzed to determine the proper treatment of these expenditures. Taxpayers should work closely with their tax advisor to assure proper compliance with the regulations. We encourage you to contact your RubinBrown advisor with any questions that you have.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
All Tax Consulting News Tax Consulting Services