Summary of the Repair Regulations and Tangible Property Regulations by Gian Pazzia ASCSP, Shareholder of KBKG, President of ASCSP.
Summary of major changes
- General Asset Account Election issue addressed - do not have to elect GAA treatment to forgo loss upon retirement of structural component.
- De minimis Rule Change - eliminated the ceiling! Amounts less than $5,000 per item can be expensed for tax as long as they are expensed on financial statements. Taxpayers without Applicable Financial Statements can use De minimis rule with a limit of $500 per item.
- Routine Maintenance Safe Harbor rule - extend safe harbor to buildings but require 10 years as the period which a taxpayer must reasonably expect to perform the relevant activities more than once.
- Relief for Small Businesses - small taxpayers (<$10M) can elect not to apply improvement rules to eligible building (<$1M). If total amount paid < $10,000 or 2 percent of unadjusted basis of the building.
- Changes to definitions of Betterments and Restorations.
- Dispositions - the Proposed Regulations for Dispositions change the rules for partial dispositions of assets. Require making timely elections.
Repair Regulations / Tangible Property Regulations Items of Note
- Many sections of the repair regulations must be applied retroactively to all prior years where it presents a material difference in tax liability. IRS has not provided clear guidance on how far back to go.
- Must File Form 3115 “Change of Accounting Method” for several sections of the tangible property regulations. (most taxpayers 4-6 CAMs)
- Cost Segregation Studies are more relevant
- For repair determination and for retirement purposes
- May require more detail than a standard cost segregation study
- Rules generally apply to tax years beginning on/after 1/1/2014 (but also apply to cost incurred in prior years).
Costs to repair or improve tangible property in prior years required to conform to the Final Repair Regulations.
- If you did a “repair regulations study” in a prior year, you may have to revisit those.
- Final & Temporary Repair Regulations. require Changes of Accounting Methods to be filed. Several sections require full 481(a) adjustments for prior years as mentioned above.
- Options for tax years beginning 1/1/2012 & 1/1/2013
- Continue with existing accounting methods
- Early adopt the 2011 Temp Repair Regulations.
- Early adopt the Final Repair Regulations.
- All taxpayers must conform to the Final Repair Regulations for tax years beginning 1/1/2014
- Sections below are implemented on “cut-off” basis and do NOT require 481(a) adjustments. Only apply to amounts paid on/after 1/1/2014
Effective Dates for “Cut-Off” Sections of the Repair Regulations / Tangible Property Regulations
- Sections below do NOT require 481(a) adjustments. Applied to amounts for tax years on/after 1/1/2014 with option to apply to tax years beginning on/after 1/1/2012.
- Materials and supplies (Reg. sec. 1.162-3)
- De minimis rule ("capitalization threshold“) (Sec. 1.263(a)-1(f))
- Costs for acquisition of real property (Sec. 1.263(a)-2(f)(2)(iii))
- Employee comp and overhead costs for acquisition of real/personal property (Reg. sec. 1.263(a)-2(f)(2)(iv))
- Inherently facilitative amounts for acquisition or production of real/personal property (Reg. sec. 1.263(a)-2(f)(3)(ii))
- Safe harbor for small taxpayers (Reg. sec. 1.263(a)- 3(h))
- Optional regulatory accounting method for amounts to repair, maintain, or improve tangible property (Reg. sec. 1.263(a)-3(m))
- Election to capitalize repair and maintenance costs (Reg. sec. 1.263(a)-3(n))
- Section 263A direct material costs (Reg. sec. 1.263A-1(e)(2)(i)(A))
- Section 263A indirect material costs (Reg. sec. 1.263A-1(e)(3)(ii)(E)).
- For early adopters, there is transition relief to make certain elections on 2012 & 2013 amended returns.
KBKG will identify your missed deductions and help you conform to the new Repair Regulations.
We offer a full service, turnkey solution with Big 4 in house professionals. Contact us to get started, call 877-525-4462 or email [email protected]. To see if you qualify for a Tangible Property Regulations study, fill out the form and tell us about your assets.