Tangible Property Regulations: Action Required for Early Adoption

Oct. 3, 2013

Beginning with the 2014 tax year, taxpayers are required to adopt the recently finalized U.S. Department of the Treasury tangible property regulations. However, taxpayers have the option to adopt part or all of the regulations for tax years beginning in 2012 or 2013. Companies that act quickly can take advantage of several available elections in the final regulations.

To benefit from select provisions of the final regulations, taxpayers will need to include the following elections annually with their timely filed federal income tax returns:

  • De Minimis Safe Harbor. Taxpayers with applicable financial statements may expense up to $5,000 per item or invoice in accordance with written financial accounting policies in place on the first day of the tax year. Applicable financial statements include statements required to be filed with the Securities and Exchange Commission, audited financial statements, and financial statements required to be provided to the federal or a state government or to any federal or state agency. Taxpayers without applicable financial statements may expense up to $500 per item or invoice in accordance with their financial accounting policies in place on the first day of the tax year.
  • Financial Statement Conformity for Repair and Maintenance Expenses. Taxpayers may elect to capitalize repair and maintenance expenses on tangible property to the extent the expenses are treated as capital expenditures in the taxpayer’s books and records.
  • Optional Acquisition Cost Capitalization. Taxpayers that incur employee compensation and overhead costs that facilitate the acquisition of tangible property may elect to capitalize those costs.
  • Optional Rotable Spare Part Capitalization. Taxpayers may elect to capitalize and depreciate the cost of any rotable spare part, temporary spare part, or standby emergency spare part.
  • Small Taxpayer Building Improvement Safe Harbor. Taxpayers with average annual gross receipts less than $10 million for the past three years may elect to expense all building repair and improvement expenses for the year, not to exceed the lesser of:
    • 2 percent of the unadjusted basis of building property
    • $10,000

The regulations permit taxpayers with a tax year ending on or before Sept. 19, 2013, to file an amended fiscal or calendar-year 2012 tax return to make these elections. The amended return must be filed within 180 days from the extended due date of the original return, even if the original tax return was not extended. However, taxpayers with 2012 tax years that end after Sept. 19, 2013, are required to make these elections on their timely filed federal income tax returns.

The proposed regulations covering dispositions of property provide for an election that can be made for tax years beginning on or after Jan. 1, 2012. This election provides a deduction when a portion of an asset is disposed. At this time, the election in the proposed regulations is limited to tax years beginning on or after Jan. 1, 2012, but more favorable rules might be forthcoming in the form of transition guidance.

Taxpayers should carefully consider the effect of the elections in the regulations and whether to implement any of them prior to the required effective date for tax years beginning during 2014. Note that taxpayers still need to implement the remaining sections of the regulations by 2014.

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