Update on repair regulations

Transcription

1 Update on repair regulations NCFC Legal, Tax & Accounting Conference February 8, 2013

2 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. These materials are copyrighted to the company of the presenter presenting them. 1

3 The tangible property regulations Organization of regulations three buckets Acquisition costs De minimis rule Materials and supplies Transaction costs Repair and maintenance costs Unit of property Capitalization standards Dispositions Building structural components General asset accounts 2

4 Background and update Regulations are both temporary and proposed 2006 and 2008 proposed regulations withdrawn Some companies filed very favorable method changes through December 31, temporary & proposed regulations issued December 23, 2011 Notice November 20, 2012 Temporary now effective for first tax year beginning on or after January 1, 2014 Early adoption permitted for tax years beginning on or after January 1, 2012 Proposed certain sections will likely be modified Final expect to be issued in 2013 and effective for tax years beginning on or after January 1, 2014 Two-year window for filing automatic consent method changes Form 3115 Automatic Method Changes permitted for tax years beginning after Dec 31, 2011 See Rev. Proc and Rev. Proc

5 Background and update (continued) LB&I stand down order LB&I directive LB&I (issued March 15, 2012) Agents directed to discontinue exam activity for tax years beginning before Jan 1, 2012 Agents directed not to examine issues for tax years beginning after Dec 31, 2011 but before Jan 1, 2014 (but will perform risk assessments on Form 3115s filed for possible exam) Time intended for taxpayers to file required method change during to comply with temporary regulations. Will IRS extend stand down order into 2014? Agents will apply normal exam procedures for tax years beginning on or after 1/1/2014 Expected changes in final regulations from current temporary regulations Notice identified the following: Numerous written comments were received and public hearing held 5/9/2012 Treasury may revise de minimis rule, dispositions, safe harbor for Routine Maintenance Revisions will take into consideration comments including request for small business relief Practitioners also anticipate changes to rules for dispositions of structural components of buildings, which may eliminate the need to make a general asset account election for building property 4

6 Background and update (continued) Form 3115 Method Change Considerations (Automatic Change under Rev. Proc ) Generally favorable (negative) 481(a) adjustments taken into account in one year Generally unfavorable (positive) 481(a) adjustments taken into account in four years Cooperatives: Rev. Proc refers to Rev. Rul (generally must take entire 481(a) adjustment into account in one year). (R.R. dealt with LIFO to FIFO change) Might a cooperative apply normal four year period for non-patronage income? What about a cooperative that distributes on a book basis and is not changing book accounting method? Industry specific guidance in progress: Power Generation Gas Pipeline Cable Companies Retail Industry (National Retail Federation and Retail Industry Leaders Association) 5

7 Starting a New Tangible Property Regulations Project One Approach

8 One approach We started with gaining a good understanding of what we are ACTUALLY doing now: With the balance sheet accounts (capitalized assets); In the P&L accounts (expense of items) Countrymark Cooperative Holding Corp. All rights reserved. 7

9 Capitalized items

10 Detail from fixed asset ledger Sys No Decription Co Asset No Location In Svc Date Acquired Value TANK 17 REPAIRS /1/ , TANK 25 GASOLINE STORAGE TANK RECONSTRUCTION /1/ , Tank #3 Repairs CER /30/ , REFINERY OFFICE /1/ , FCC WYE REPLACEMENT /1/ , FCC ORIFICE CHAMBER REPLACEMENT /1/ , TANK 25 REPAIRS INCLUDING FLOATING ROOF, ANNULAR RING, PIPING NOZZLES /1/ , TANK 19 INTERNAL FLOATING ROOF AND REPAIRS /1/ , H-104 REHEATER /1/ , LSG GROUND PAVING /1/ , Crude Vapor Heat Exchanger Replacement (200-E-101) CER /30/ , n/a EQ Acq: Lease Sims Field - Tank Battery 109 5/1/ , PIPELINE REPLACEMENT /1/ , n/a Greathouse 1H: longstring casing 31 1/31/ , n/a 2005 Freightliner replace Unit # /28/ , n/a 346 Engine rebuild 30 8/31/2010 5, Countrymark Cooperative Holding Corp. All rights reserved. 9

11 ASSET N CER Description of activity Tank 17 Repairs Explanation: Tank 17 is a 25,000 bbl storage tank for gas oil which will be taken out of service for repair in March, An API inspection will be performed in addition to inspecting and possibly replacing the floor and upgrading the manways and nozzles to meet present code requirements Countrymark Cooperative Holding Corp. All rights reserved. 10

12 ASSET N CER Description of activity Most of the described expenditures appear to be routine maintenance. The upgrades to meet code may need to be capitalized Countrymark Cooperative Holding Corp. All rights reserved. 11

13 Detail from fixed asset ledger Sys No Decription Co Asset No Location In Svc Date Acquired Value TANK 17 REPAIRS /1/ , TANK 25 GASOLINE STORAGE TANK RECONSTRUCTION /1/ , Tank #3 Repairs CER /30/ , REFINERY OFFICE /1/ , FCC WYE REPLACEMENT /1/ , FCC ORIFICE CHAMBER REPLACEMENT /1/ , TANK 25 REPAIRS INCLUDING FLOATING ROOF, ANNULAR RING, PIPING NOZZLES /1/ , TANK 19 INTERNAL FLOATING ROOF AND REPAIRS /1/ , H-104 REHEATER /1/ , LSG GROUND PAVING /1/ , Crude Vapor Heat Exchanger Replacement (200-E-101) CER /30/ , n/a EQ Acq: Lease Sims Field - Tank Battery 109 5/1/ , PIPELINE REPLACEMENT /1/ , n/a Greathouse 1H: longstring casing 31 1/31/ , n/a 2005 Freightliner replace Unit # /28/ , n/a 346 Engine rebuild 30 8/31/2010 5, Countrymark Cooperative Holding Corp. All rights reserved. 12

14 ASSET N and 380 CER Description of activity FCC Wye Replacement This CER is for material and labor to replace the Wye in the FCC. FCC Orifice Chamber Replacement The purpose of the orifice chamber is to hold back pressure on the regenerator in the FCC Countrymark Cooperative Holding Corp. All rights reserved. 13

15 ASSET N and 380 CER Description of activity The FCC is a unit of property in that it can work independently, therefore the replacement of components may qualify as routine maintenance Countrymark Cooperative Holding Corp. All rights reserved. 14

16 Expense of items

17 Expense of items What are we looking for? Where do we look? 2013 Countrymark Cooperative Holding Corp. All rights reserved. 16

18 Expense of items What are we looking for: Repairs and maintenance costs Items costing less than $100, consumables, supplies, items with a life of 12 months or less Incidental materials and supplies no inventory or record of consumption is maintained Rotable and temporary spare parts Non-incidental materials and supplies an inventory or record of consumption is maintained Capital items 2013 Countrymark Cooperative Holding Corp. All rights reserved. 17

19 Expense of items Where are we looking? Repairs Vehicle R&M Plant R&M Building R&M Materials and Supplies Operating Supplies, Small Tool Operating Supplies, Plant Office Supplies/Equipment Vehicle Operation, Tires 2013 Countrymark Cooperative Holding Corp. All rights reserved. 18

20 Expense of items What do we find? Account Desc Description Amount InvoiceNum InvoiceDate Repairs & Maintenance Exp Airgas Mid America Rental - Acetylene, argon, nitrogen, o /30/2011 Repairs & Maintenance Exp Stinson Brothers Welding Service, Inc. repaired mud pum 9, /11/2011 Repairs & Maintenance Exp Stinson Brothers Welding Service, Inc. made 4 chemical p /18/2011 Repairs & Maintenance Exp Airgas Mid America 1 nitrogen cylinder /26/2011 Repairs & Maintenance Exp Airgas Mid America Cylinder rental: acetylene, argon, nit /31/2011 Repairs & Maintenance Exp Earl's Tank Truck Service, Inc. Fort Branch Yard clean /3/2011 Repairs & Maintenance Exp VIP Cleaning Service Company, Inc. trash can liners /17/2011 Repairs & Maintenance Exp Stinson Brothers Welding Service, Inc. Ft Branch Yard we /10/2011 Repairs & Maintenance Exp Memmer's Farm Store Blade kit, 12 pk poly cut blades, sti /12/2011 Repairs & Maintenance Exp Airgas Mid America 1 oxygen cylinder /30/2011 Repairs & Maintenance Exp Earl's Tank Truck Service, Inc. Gibson County Hwy Spread 1, /22/2011 Repairs & Maintenance Exp Earl's Tank Truck Service, Inc. Gibson County Hwy Spread 1, /30/2011 Repairs & Maintenance Exp Airgas Mid America acetylene surcharge /18/2011 Repairs & Maintenance Exp Airgas Mid America acetylene, nitogen, oxygen cylinders /31/2011 Repairs & Maintenance Exp Romain Cross Point Auto Park Unit 36 Full detail /4/ Countrymark Cooperative Holding Corp. All rights reserved. 19

21 Expense of items, (continued) Vehicle Repairs Kim Hamilton Unit #79 oil & oil filter- service /12/2011 Vehicle Repairs Kim Hamilton Unit # 41 alignment, ball & jon 1, /14/2011 Vehicle Repairs ACT Automotive & Tire Unit #51 brake pads, /18/2011 Vehicle Repairs NAPA Auto Parts battery /18/2011 Vehicle Repairs Hargis Glass Plus, Inc. Unit #79 windshield re /19/2011 Vehicle Repairs ACT Automotive & Tire Unit #51 oil & filter-s /20/2011 Vehicle Repairs Robertson Welding & Repair Shop, LLC Truck /21/2011 Vehicle Repairs Flora Auto PArts, Inc. Unit #51 adapter, harne /25/2011 Vehicle Repairs ACT Automotive & Tire Unit #51 rebuilt alter /26/2011 Vehicle Repairs Bradford Supply Company Unit #26 coupler g /26/2011 Vehicle Repairs National Oil Well Unit #24 ss clamp hose, du /28/2011 Vehicle Repairs Robertson Welding & Repair Shop, LLC Unit # /31/2011 Vehicle Repairs ACT Automotive & Tire Unit #40 replaced 2 t 1, /31/2011 Vehicle Repairs GJ039 COUNTRYMARK INVOICE # , /31/2011 Vehicle Repairs Dusty's Tire Trailer #61 2 tires, rim /1/2011 Vehicle Repairs NAPA Auto Parts Unit #41 brake fluid /31/2011 Vehicle Repairs Dusty's Tire Ford Truck new tires /7/ Countrymark Cooperative Holding Corp. All rights reserved. 20

22 Expense of items Don t be overwhelmed, sampling is allowed to figure out, broadly, what you have in the buckets Countrymark Cooperative Holding Corp. All rights reserved. 21

23 Take-aways Defining Unit of Property ; Defining and Understanding Routine Maintenance ; Defining and Identifying Capital items; Items costing less than $100; Consumables, supplies, items with a life of 12 months or less; De minimis items; Spare parts 2013 Countrymark Cooperative Holding Corp. All rights reserved. 22

24 Decision flow charts capitalization vs. deductible repair

25 Unit of property Buildings Everything Else Single UOP Default Rule Plant Property Network Assets Functional Interdependence Discrete and major function Facts & circumstances - industry specific 24

26 Unit of property buildings Determine UOP Apply Capitalization Standards Capitalize Improvements to UOP Entire building Building structure Building systems Entire building HVAC Plumbing system Electrical system All escalators All elevators Fire protection Security system Gas distribution 25

27 Capitalization standards Improvement standards an amount paid must be capitalized if it results in a: Betterment to the unit of property Adaptation of the unit of property to a new or different use Restoration to the unit of property 1. Material condition or defect at acquisition or production 1. Replacement and recognition of a loss on disposed of component 2. Material addition or expansion 2. Gain/loss on sale of a component 3. Material increase in: Quality, Capacity, Productivity, Efficiency, or Strength Basis adjustment as a result of a casualty loss Return to former operating condition no longer functioning 5. Rebuild the property to like new condition after the class life 6. Replacement of major component or substantial structural part 26

28 Tax capitalization policy flowchart 27

29 Frequently asked questions (FAQs)

30 Frequently asked questions (FAQs) The Repair Regulations : Frequently Asked Questions (Tax Analysts Tax Notes October 8, 2012) (Copy of Article in Participant Materials) Acquisition Costs Repair Costs, Units of Property Capitalization Standards Dispositions of Tangible Property Considerations for Cooperatives 29

31 Acquisition costs FAQs If a written policy exists to deduct, for book purposes, any expenditure under a certain dollar amount, may this same method be used for tax purposes? My IRS exam team has agreed to a more generous de minimis policy than the regulations allow. Can I continue using that policy? Do the temporary regulations allow a deduction for all de minimis costs? Do I calculate the ceiling at the entity level or the consolidated level? How are materials and supplies treated under the temporary regulations? Do I need to review every transaction or invoice for materials and supplies? How does the tax treatment of rotable spare parts differ from that of normal spare parts? 30

32 Repair costs, units of property FAQs Since the temporary regulations now require the segmentation of buildings into smaller units in applying the capitalization standards, can the smaller units be used for depreciation purposes in establishing shorter lives than 39 years? Is a cost segregation study now required to determine the cost of a building s subsystems? How does a company identify the units of property for plant property? Regulations include an example of a tortilla machine that is not considered plant property because it is not serving an industrial process. Does this mean that all food processing equipment is not plant property? 31

33 Capitalization standards FAQs If maintenance costs do not result in a betterment to its unit of property, may the costs be deducted under section 162(a))? If a new backup power switch costing less than $100 is added to an existing unit of property, must the cost be capitalized? If cost are incurred to rearrange and freshen the interior space of an existing retail store, may the cost be deducted? What is a major component of a unit of property? What if part but not all of a major component is replaced? Does the routine maintenance safe harbor apply to a new part that is safer or more durable than the old part it replaced? Can a change in accounting for repair & maintenance costs be done using a cutoff method instead of a section 481(a) adjustment? How far back must a company compute the section 481 adjustment? 32

34 Dispositions FAQs Is there a downside to making a GAA election? What if I don t make the GAA election? Should a GAA election be made for all property or only for buildings? How does a company make a GAA election? Can a GAA election apply to assets acquired prior to 2012? How do I determine basis of building component dispositions? What is a structural component for this purpose? How is the stranded basis of disposed of components recovered, where the company continued to depreciate the costs under its prior method? Does a GAA election have to be made to recover the stranded basis? Should a company start tracking the basis of building components when it first acquires them? 33

35 Considerations for Cooperatives FAQs What is the applicable period for taking into account Section 481(a) adjustments, both positive and negative, into taxable income, applicable to cooperatives? What are the considerations for patronage allocations on a book basis versus a tax basis method? Are there any considerations around the required 8.5 month payment period for distribution of patronage? 34

36 Application and implementation Three buckets - Acquisition costs - Repair and maintenance - Dispositions

37 Application & implementation - Acquisition costs

38 The first bucket Acquisition costs Consider Book conformity de minimis rule Determine book capitalization threshold amount for: Is there a written plan in place at the beginning of the year? Are the amounts expensed on an applicable financial statement (AFS)? Calculate the ceiling limit at the entity level if possible; if not, the consolidated or affiliated levels: The greater of 0.1% of tax gross receipts or 2% of book depreciation & amortization Materials and supplies elected to be treated as de minimis costs are included in determining if ceiling limit is reached Aggregate amounts below the ceiling limit are expensed same as book Amounts above the ceiling limit are capitalized for tax Can elect out of book conformity, cherry-pick applicable amounts, and capitalize and depreciate for tax 37

39 Example Acquisition Costs Numerous account types Multiple items that cost less than $5,000 are expensed using numerous accounts under book policy: Repairs and maintenance Incidental materials and supplies Nonincidental materials and supplies Acquired tangible property 38

40 Example acquisition costs numerous account types (continued) Identify and exclude these from the ceiling: Materials and supplies capitalized and depreciated Incidental materials and supplies deducted in year purchased Ceiling greater of 1% of gross receipts or 2% of book depreciation and amortization Deduct amounts below ceiling in the year purchased: Repairs and maintenance Nonincidental materials and supplies deducted when used or consumed Acquired tangible property expensed as de minimis 39

41 Acquisition Costs: Materials and supplies Common methods Common methods: Inventory materials and supplies and deduct when used or consumed nonincidental Deduct in year purchased - Incidental Capitalize and depreciate rotable & temporary spare parts Deduct in the year purchased under book de minimis policy 40

42 Acquisition Costs: Materials and supplies Materials and supplies (M&S) defined: 1. A component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer 2. A unit of property with an economic useful life of 12 months or less 3. A unit of property that has an acquisition or production cost of $100 or less 4. Fuel, lubricants, water and similar items that are reasonably expected to be consumed within 12 months or less, beginning when used in the taxpayer s operations 5. Property identified in published guidance as M&S 6. Rotable or temporary spare parts Non-incidental (used or consumed) vs. incidental (in the year purchased) May deduct all M&S in the year purchased under the de minimis rule May elect to capitalize and depreciate cannot go back (CAUTION!) 41

43 Acquisition Costs: Rotable and temporary spare parts Rotable spare parts: M&S acquired for installation on a UOP, removable from UOP, repaired, and re-used Temporary spare parts: M&S used until a new or repaired part can be installed the removed and stored for later Option 1 Deduct full basis on final disposition Option 2 Capitalize and depreciate Option 3 Optional method exchange type treatment Option 4 Deduct under de minimis rule 42

44 Application and implementation - Repair and maintenance

45 The second bucket Repair and maintenance costs Unit of property standard New definitions, but still many grey areas Capitalization standards Largely same factual standards as under prior law Exceptions and safe harbors Routine maintenance safe harbor Incorporation of section 263A standard for indirect costs 44

46 Repair Costs: Exception to general capitalization standard Routine maintenance safe harbor Routine maintenance expected to be performed more than once during property s class life Inapplicable to: Betterments Certain restorations Buildings Distinguish repairs and maintenance expense under book min cap policy 45

47 Repair Costs Apply 263A Standard for Indirect Costs Repeal of Plan of Rehabilitation Doctrine Replaced with section 263A standard: capitalize costs that directly benefit or are incurred by reason of improvement Implications for store refreshes/remodels 46

48 Repair vs. improvement determination Facts and circumstances determination vs. bright-line rules General framework of temporary regulations Regulatory accounting method Specific to FERC, FCC, STB Industry specific guidance Network Assets Rev. Proc (wireline assets) 12 percent Rev. Proc (wireless assets) 5 percent Rev. Proc (electric T&D): percentage of units of linear property replaced Additional IIRs expected 47

49 Review current capitalization policies/accounting methods Assess and Document Current Policies Review GAAP and or tax capitalization policies Obtain tax FA download Separate remodel assets from line-item assets Separate further based on logical relationships (location, project, etc.) Apply capitalization standards in temporary regulations and UOP definitions For buildings, use the building structure and building systems Document findings Invoices Interviews Develop new tax capitalization policy, if applicable Assess possible system changes going forward 48

50 Action items Repairs and maintenance Action items Analyze current method for repairs relative to new capitalization standards Determine if method change is necessary File Forms 3115 Prepare and file applicable Form 3115s (Rev. Proc ) Favorable method changes: Deducting repair and maintenance costs (Automatic Change 162) Routine maintenance safe harbor (Automatic Change 171) Unfavorable method changes: Capitalizing improvements to tangible property (Automatic Change 174) Regulatory accounting method (Automatic Change 163) 49

51 Application and Implementation Dispositions

52 The third bucket Dispositions Generally, for this purpose, a disposition is a transfer of ownership of the asset or the permanent withdrawal of an asset from the trade or business. Includes: Sale or exchange Retirement Physical abandonment Destruction Transfer to a supplies, scrap, or similar account Retirement of a structural component of a building Involuntary conversion 51

53 The third bucket Dispositions (continued) New default rule: discontinue depreciating basis of components upon disposition Example: new roof capitalize cost of new roof, discontinue depreciating basis of old roof Required to deduct remaining basis of old roof? Deducting remaining basis of retired components prevents deducting cost of replacement under restoration standards Roofs Windows General asset accounts ( GAAs ) Generally, any combination of assets by vintage, MACRS class life, and depreciation methods Provides flexibility following dispositions Leave basis of component in GAA, continue depreciating, and perhaps deduct repair costs, or Recover remaining basis immediately and capitalize replacement costs 52

54 Dispositions Comparison Default Treatment General Asset Account Election Depreciation stops Gain or loss recognized 1. Depreciation continues - no immediate recovery of basis 2. Optional Termination of GAA if: Disposition of all or last asset in GAA, or Qualifying disposition 53

55 Structural component dispositions Assessment Assessment process Review current retirement policies (GAAP and or Tax) Determine whether building structural components were retired in prior years Tax fixed asset ledger review Group assets by location/property and sort by tax life to identify section 1250 real property Sort the 1250 real property assets by placed in service date to identify the original assets placed in service for each location Once the original assets have been identified, determine if there are assets placed in service during subsequent tax years that represent the same structural components as the original assets 54

56 Dispositions Action items Consider making late GAA election for all property acquired before 2012 Automatic change in accounting method Must be made within 2 years of regulations effective date Consider scrubbing fixed asset records for remaining stranded basis and recovering through an accounting method change Can be done independently of GAA election, and vice versa Prepare and file applicable Form 3115s (Rev. Proc ) Disposition of a building or structural component (with no GAA election) (Automatic Change 177) Dispositions of tangible depreciable assets other than buildings and structural components (Automatic Change 178) Late election to use general asset accounts (Automatic change 180) Late election to recognize gain or loss on item in qualifying disposition (retirement of structural components, for example) (Automatic change 180) 55

57 Contact information David Antoni John Hiatt Countrymark Cooperative Holding Corp. All rights reserved. 56

58 Thank you

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