All taxpayers that have capital expenditures or incur repair and maintenance costs will be impacted by the Tangible Property Regulations that go into effect for tax years beginning on or after January 1, 2014. For calendar year taxpayers, the last quarter of 2014 is a great time to take action to make changes required by the Regulations and take advantage of opportunities that they provide.
These new Regulations make significant changes to rules related to the determination of whether expenditures for tangible property must be capitalized or expensed. This can have a substantial impact on law firms undertaking office improvements by accelerating tax deductions for some improvements and positively impacting cash flow. In addition, the Regulations refine and in many ways broaden the definition of deductible repairs.
Compliance Considerations – Additional compliance will be necessary to apply these Regulations as required on your 2014 tax return. Because your law firm owns tangible property and incurs repairs and maintenance costs, this additional compliance burden cannot be avoided. There will be additional forms and elections that need to be filed with your 2014 tax return. Even if you want to keep treating your property as you always have, additional forms and elections will be necessary to do so.
Beyond Compliance – In taxation, where there is change, there is opportunity. The time is now for you to capitalize on that opportunity. Below is a sample of the potential tax benefits available from a proactive approach to the application of these Regulations to your firm:
- De minimis capitalization policy and election – With the expiration of the higher level of bonus and Section 179 depreciation limits in 2013, the de minimis expensing provisions afforded by the Regulations are one of the few remaining mechanisms to quickly write-off your expenditures on tangible property. For tax purposes, you can follow written book policies and expense up to $5,000 per item per invoice for audited financial statements or $500 per item per invoice for non-audited financial statements.
- Deduction of prior capitalized repair and maintenance costs – The rules have changed. Many types of expenditures previously required to be capitalized now fit the definition of deductible repairs and, with proper planning, are eligible for immediate write-off on your 2014 tax return. Office remodeling expenditures could qualify for expense rather than capitalization treatment.
- Definition of unit of property – Again, the rules have changed. 2014 presents an opportunity for you to define (or re-define) your units of property for optimal tax benefit. Generally, the larger the unit of property that can be justified, the more likely an individual expenditure upon that unit of property will be treated as a deductible repair for tax purposes.
- Routine maintenance – Do you perform similar expenditures on a routine basis more than once over the expected life of a unit of property? These expenditures, which can be significant in dollar amount, are now eligible for immediate write-off on your 2014 and future tax returns.
- Partial assets dispositions and removal costs – Have you replaced a significant piece of property (i.e. a roof or fixtures)? Whether such replacement occurred in 2014 or a previous year, mechanisms exit under the Regulations to write-off the remaining basis in and the costs to remove the replaced property (i.e. the old roof). For previous office renovations, opportunities exist for significant write off of old improvements.
Since many of the above opportunities apply to both current and prior year expenditures, the expected tax benefits may be quite significant depending on the size and nature of the business. Many of these changes are one-time opportunities which must be seized in 2014 to avoid significant additional costs to do so in later years.
So what action should you take? Contact your RubinBrown advisor today for a detailed consultation regarding the application of these new Regulations to your law firm, and see how these changes may benefit you.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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