Tangible Property Regulations Finalized
Sept. 19, 2013
On Sept. 13, 2013, the U.S. Department of Treasury finalized the highly anticipated tangible property regulations and reissued in proposed form the regulations addressing accounting for the disposal of components of tangible property.
The final regulations largely retain the rules set forth in the temporary regulations issued in December 2011, with the following significant modifications:
- There are several changes reducing the burden associated with administering the de minimis safe harbor provisions, including:
- Removing the ceiling limiting a taxpayer’s de minimis deductions to 0.1 percent of gross receipts or 2 percent of depreciation and amortization expense
- Changing the de minimis safe harbor method to be elective instead of mandatory
- Allowing taxpayers with applicable financial statements to expense $5,000 per item or invoice in accordance with financial accounting policies
- Allowing taxpayers without applicable financial statements to expense $500 per item or invoice in accordance with financial accounting policies
- Clarifying that changes to a taxpayer’s financial accounting policies do not constitute a method change for purposes of the final regulations
- Placing the burden of proof on taxpayers to demonstrate that their method of expensing clearly reflects income if they do not use a safe harbor method
- A taxpayer may elect to capitalize repair and maintenance expenditures as improvements if the taxpayer treats such costs as capital expenditures for financial accounting purposes. The election will be made on an annual basis by attaching a statement to the taxpayer’s timely filed original federal tax return (including extensions) for the taxable year in which the improvement is placed in service. This change is intended to reduce administrative burden.
- Many of the accounting method changes required under the final regulations will need to be implemented using a Section 481(a) adjustment. In the preamble to the final regulations, Treasury and the IRS acknowledge that computing a Section 481(a) adjustment might be burdensome for taxpayers and give the impression that there might be some flexibility in how the rules are adopted. More information might be provided when the transition guidance to the final regulations is issued.
- Additional areas of change resulting from the final regulations include:
- A safe harbor regarding building improvements for small taxpayers (those with gross receipts of $10 million or less)
- Refined criteria for defining betterments and restorations
- A safe harbor extension to expense routine maintenance for buildings
- A definition of standby emergency spare parts
- Expanded definition of materials and supplies to include property that costs $200 or less (increased from $100)
The rules regarding the disposition of tangible depreciable property have been reissued in proposed form. Taxpayers may rely on the proposed rules until the rules are issued in final form. The proposed disposition rules allow taxpayers to elect to claim a loss upon the disposition of a structural component of a building or upon the disposition of a component of any other asset without identifying the component as an asset before the disposition event.
The election will be made on an annual basis by reporting the gain, loss, or other deductions in the taxpayer’s timely filed original federal tax return (including extensions) for the taxable year in which the portion of the asset is disposed by the taxpayer. These proposed regulations generally apply to taxable years beginning in 2014, with the option for early adoption. Treasury indicates an anticipated issuance of final regulations in this area before the end of 2013.
Taxpayers should carefully consider the effect of the optional methods and elections contained in the regulations as these will have a significant impact on the accounting for materials and supplies, rotable spare parts, de minimis units of property, and dispositions of a building’s structural components.
Most taxpayers will be required to make changes to their current accounting methods to comply with the regulations. An accounting method change to adopt the regulations will require taxpayers to file IRS Form 3115, “Application for Change in Accounting Method,” under automatic consent provisions pursuant to forthcoming IRS guidance.
Although the regulations are effective for tax years beginning in 2014, IRS transition rules provide taxpayers with the flexibility to adopt the regulations with their 2012, 2013, or 2014 tax returns.
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