Tangible Property Regulations - an MPS|CPA Presentation
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The document outlines the regulations surrounding tangible property, including the applicability, rules for capitalization versus expensing, and the implications for taxpayers with fixed assets. It highlights the importance of determining whether expenditures classify as repairs or improvements under the RABI rules, and details safe harbor elections for de minimis and routine maintenance expenses. Taxpayers must file Form 3115 to reflect these changes and are encouraged to assess their past asset dispositions and present accounting policies accordingly.
Tangible Property Regulations - an MPS|CPA Presentation
- 2. • Applicability of the Tangible Property Regulations • RABI testing to determine if expense is required to be capitalized • Unit of property and building systems defined • De Minimis Safe Harbor (DMSH) election • Routine Maintenance Safe Harbor (RMSH) election • Examples Overview of Items Covered
- 3. Tangible Property Regulations Applicability • The implementation of the Tangible Property Regulations (TPRs) typically results in tax deductions. • Applies to taxpayers that own fixed assets, have depreciation, buy fixed assets, improve or dispose of fixed assets, and/or have materials and supplies. • Taxpayers are required to implement the new TPRs and will be subject to the “use it or lose it” rule. • Meaning if an item is on the depreciation schedule that should now be classified as a repair, the IRS can come in and say that item can no longer be depreciated.
- 4. • Can still amend 2014 returns if already filed to include changes for the TPR • Have up to the extended due date of the return • Must complete any prior year Partial Asset Disposition with the 2014 return • Significant deductions available for prior capitalized items identified as repairs under the new regulations • Duplicate items, such as multiple roofs, multiple leasehold improvements can now be written off Tangible Property Regulations Applicability
- 5. Tangible Property Regulations Expense vs. Capitalization • New way of thinking to determine whether an item is required to be capitalized or expensed • No longer look to dollar amount • If item improves a unit of property, it must be capitalized Subject the amount paid to the RABI rules: • R – Restoration • A – Adaptation • B – Betterment • I – Improvement
- 6. “R” Restoration • An amount paid is considered a restoration if: • Returns the unit of property to its ordinarily efficient operating condition after it had deteriorated to a state of disrepair and no longer used • Rebuilding to a like-new condition after the end of its ADS class life • Replaces a major component or substantial structural part of unit of property (must be discrete and critical) • Comprises a large physical portion of the unit of property
- 7. “A” Adaptation • An amount paid is considered an adaptation if: • Not consistent with the intended ordinary use of the unit or property at the time originally placed in service • In the case of a building, if it adapts to a new or different use.
- 8. “B” Betterment • An amount paid is considered a betterment if: • Ameliorates a material condition or material defect that existed prior to placing the property in service • Material addition to the unit of property • Material increase in productivity or output • Must also look to facts and circumstances • Purpose of the expenditure • Physical nature of the work performed • The effect of the expenditure on the unit of property
- 9. “I” Improvement •A taxpayer must capitalize all direct and indirect cost of an improvement. • Based on facts and circumstances
- 10. Determine Unit of Property • Building • Each building and its structural components is a single unit of property • Building Systems • HVAC • Plumbing • Electrical • Escalators • Elevators • Fire protection • Alarm security • Gas distribution • Item that performs a major and discrete function • Any large physical portion of the building
- 11. Items Expensed Under TPR Regulation • Repair a broken tail light • Replace a power switch assembly • 30 out of 300 windows • Wood flooring in a hotel lobby • 2 out of 8 HVAC units • Waterproof roof membrane • 30% of the wiring in a building • 2 out of 20 sinks
- 12. TPR Capitalized Examples • Building sprinkler system • All floors in public areas of hotel • Replace siding • Entire or significant portion of a roof • 200 of 300 windows • HVAC system
- 13. Rule of One • Taxpayers need to have one of every asset on its books, but can choose to have more than one, but cannot choose to have zero/none. • Building is on the asset list and taxpayer replaces the entire roof and capitalizes the new roof. • Taxpayer can choose to remove the original roof by doing a PAD and carving it out of the original building
- 14. Roof Example • Taxpayer placed a building in service in 2000 • Taxpayer put a new roof on the building in 2008 • There are now 2 roofs on the asset listing, both still being depreciated over 39 years. • Taxpayer can choose to do a partial asset disposition (PAD) to remove the portion of the building asset that relates to the roof.
- 15. • Building original cost was $1,150,000, placed in service in 2000 and is depreciating it over 39 years • Taxpayer put a new roof on in 2008 and is depreciating that new roof for $66,708 over 39 years. • Next, figure out what the replacement cost of the new roof would have been in 2000 by using the Federal Bureau of Labor Statics Producer Price Index Tables and come up with recalculated amount for new roof: $50,940 Roof Example
- 16. Roof Example • Recalculate what depreciation would have been for the new amount (17,796) and write off the remaining net book value 33,144. • The taxpayer picks up the entire deduction related to this item $33,144 in 2014.
- 17. Roof Example • Another example is identifying items that are now considered repairs under the new regulations • Roofing membrane replacement • Client replaced roof membrane in 2014 for $165,000 – wrote it off as a repair • Client had replaced roof membrane in 2013 for $233,300 – prepared a Form 3115 for method change and wrote off the undepreciated basis as a repair under new TPR. Entire deduction recognized on 2014 tax return.
- 18. Roof Example • Taxpayer is required to file a Change in Accounting Method and complete Form 3115 with its 2014 tax return • Prior year PAD must be done this year if taxpayer has anything currently on its depreciation schedule that needs to be cleaned up. • Going forward taxpayer can elect to make a PAD in the year it purchases new items that replace older assets.
- 19. Who Must File Form 3115 • Total assets of $10 million or more OR • Average gross receipts of $10 million or more for three preceding years. • For calendar year taxpayers, amounts as of 1/1/14 • NOTE: For taxpayers under above thresholds, the TPR can be applied prospectively
- 20. De Minimis Safe Harbor (DMSH) • DMSH is an election made on an annual basis by attaching statement to the tax return. • Taxpayer must expense amounts paid to acquire a unit of tangible property or material/supply if the amount is: • Below $500 per item per invoice for non-AFS • Below $5,000 per item per invoice for AFS • These amounts are subject to change by the IRS in future guidance
- 21. De Minimis Safe Harbor (DMSH) • An accounting policy in place is required • Must be in place before the beginning of the taxpayer’s year • Specify a write-off dollar amount • The safe harbor amount is not a “not to exceed” limitation • Must actually write the items off for books/financial statement purposes • Apply the DMSH to all items that qualify • If AFS, the policy must be documented and communicated
- 22. Routine Maintenance Safe Harbor Expense If: For Buildings • Plan to incur expense more than once during a 10 year period for buildings For Personal Property •Autos – 5 years •Office Furniture and Equipment – 10 years •Computers – 5 years •Equipment – varies by industry
- 23. Landlords & Tenants Leased Building •Lessee of entire building - the unit of property is the building and its structural components •Lessee of a portion of a building - the unit of property is the portion of the building subject to the lease and the structural components associated with the leased portion.
- 24. Landlords & Tenants Lessor Improvements •Landlord tenant improvements (TI) are not a unit of property separate from the building in which the improvements are done. •This enables the landlord to compare its TI expenditures against the whole building, building structures, and/or building systems. • Resulting in most TI expenditures (beyond the initial TIs capitalized for each space) classified as repair and maintenance expenses
- 25. Landlords & Tenants • The Tangible Property Regulations present a new opportunity/requirement to write off the net remaining tax basis of: • Duplicate previously capitalized TIs • TIs that did not arise to the level of being required to capitalized under the RABI rules
- 26. Landlords & Tenants • Rule of One • Example: • Under a lease, tenant must replace the roof if it needs to be replaced. • Tenant does replace the roof later • Landlord already has a roof on its books • Now there are two after the tenant replaces the roof • Position one: • Landlord can remove the duplicate asset on the landlord’s books when the lease is over and the landlord obtains the asset, until then it is owned by the tenant. • Position two: • When the tenant physically removes or abandons the prior asset, the landlord can immediately do a PAD or disposition of the prior asset.
- 27. Thank You for Attending Today’s Presentation