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Focus on Transportation & Dealerships: How Final Tangible Property Regulations Affect Transportation Industry

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While the recently released final tangible property regulations provide comprehensive guidance on capitalization of tangible property, the new rules also provide tax planning opportunities specific to the transportation industry.
November 18, 2013

While the recently released final tangible property regulations provide comprehensive guidance on capitalization of tangible property, the new rules also provide tax planning opportunities specific to the transportation industry.

The following summarizes some of the highlights of the tangible property regulations.

  • Non-incidental materials and supplies are deductible when first used or consumed, while incidental materials and supplies are deductible when purchased. Non-incidental materials and supplies are materials and supplies for which a record of consumption is maintained or a physical inventory is taken. Incidental materials and supplies are materials and supplies for which no record of consumption is maintained or a physical inventory is taken, provided taxable income is clearly reflected.
  • An election to capitalize certain materials and supplies and treat as an asset subject to the allowance for depreciation can be made, but only for rotable, temporary, or standby emergency spare parts.
  • The election may be made annually on a timely filed federal income tax return, including extensions, for the tax year the asset is placed in service by the taxpayer for purposes of determining depreciation.
  • The final repair regulations define materials and supplies as tangible property that is used or consumed in the taxpayer's operations, is not inventory, and:
    • Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and is not acquired as part of any single unit of tangible property;
    • Consists of fuel, lubricants, water, and similar items, reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer's operations;
    • Is a unit of property as determined under Reg. sec. 1.263(a)-3(e) that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer's operations;
    • Is a unit of property as determined under Reg. sec. 1.263(a)-3(e) that has an acquisition or production cost of $200 or less; or
    • Is identified in published guidance in the Federal register or in the Internal Revenue Bulletin as materials and supplies for which treatment is permitted under Reg. sec. 1.162-3.
  • Both rotable and temporary spare parts are included as materials and supplies under Reg. sec. 1.162-3.
  • The final repair regulations define rotable spare parts as materials and supplies that are acquired for installation on a unit of property, removable from that unit of property, generally repaired or improved, and either reinstalled on the same or other property or stored for later installation.
  • Temporary spare parts are defined as materials and supplies that are used temporarily until a new or repaired part can be installed and then are removed and stored for later installation.
  • A taxpayer has three methods for treating costs related to rotable and temporary spare parts as provided under the final repair regulations.
    • In general, a taxpayer may deduct the cost of rotable and temporary spare parts in the tax year in which the taxpayer disposes of these parts.
    • A taxpayer may elect to capitalize and depreciate the cost of these parts over the relevant recovery period, provided that the rotable or temporary spare part meets certain restrictions.
    • The optional method for rotable and temporary spare parts provided in Reg. sec. 1.162-3(e) permits a taxpayer to:
      • Deduct the amount paid to acquire or produce the part when the part is initially installed,
      • Include in gross income the fair market value (FMV) of the part when removed from the unit of property, and include the FMV of the part and cost to remove the part from the unit of property in the basis of the part,
      • Add to the basis of the part any amount paid to maintain, repair, or improve the part,
      • Deduct the cost to reinstall the part and basis not previously deducted in the tax year in which the part is reinstalled, and
      • Deduct any remaining basis in the part in the tax year in which the part is disposed of.
  • "Standby emergency spare parts" were added as a new materials and supplies category in the final repair regulations.
    • Standby emergency spare parts are defined as materials and supplies that are acquired when particular machinery or equipment is acquired, set aside for use as replacements to avoid substantial operational time loss, located at or near the site of the installed related machinery, directly related to the machinery or piece of equipment they service, normally expensive, only available on special order and not readily available from a vendor or manufacturer, not subject to normal periodic replacement, not interchangeable in other machines or equipment, not acquired in quantity, and not repaired and reused.
    • Standby emergency spare parts are treated consistently with the treatment of rotable and temporary spare parts.
    • However standby emergency spare parts are not eligible for the third, optional method described above for rotable and temporary spare parts.

Transportation Companies: For Your Action Before Year End

Establish or revise a written policy to expense certain "de minimis" expenditures. A taxpayer must have a 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) that it follows for book purposes to expense these expenditures for tax purposes. Taxpayers with an Applicable Financial Statement may apply the $5,000 de minimis safe harbor limit on an invoice or item level following the policy used for its financial records. Taxpayers without an Applicable Financial Statement may apply the de minimis safe harbor rule with a limit of $500 per invoice or item. Generally an Applicable Financial Statement consists of an audited financial statement.

Develop a method or process to capitalize/inventory "non-incidental materials and supplies." Such items are to be expensed when used or consumed rather than when purchased.

For additional information, please refer to the article, Focus on Taxation: Final Tangible Property Regulations Issued.

 

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.

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