Tangible Property Regulations

Transcription

1 Tangible Property Regulations Maryland State Bar Association November 2013 Presented by Eric P. Wallace, CPA

2 First Discussion Topic The In-House Issues 1. Identifying the company/client issues that will arise from the final tangible property regulations (TPR) implementation 2. Review depreciation schedules for items that need corrections This review will guide you to issues to address for the TPRs 2

3 First Discussion Topic The In-House Issues 3. Educate your company/clients on Client Value What we are going to need to do for them (from filing 3115 forms) to our costs related to performing these tasks for them Company The effort that is necessary, internally and externally, in order to correct prior errors, fix or create tangible property policies, adopt TPR methods, file 3115s 3

4 First Discussion Topic The In-House Issues 4. The filing of beneficial 3115s (those with negative 481(a) adjustments) for prior or partial building components disposed of (these are write offs) and the depreciation corrections (how to gather the facts) 5. Advise the company/clients on what 3115s will have to be filed in current and future years (no later than tax year 2014) 4

5 First Discussion Topic The In-House Issues 6. Whether we are going to employ the temporary or final TPRs for our company/clients for what method changes, and 7. The internal processes your company/clients will have to implement by 2014 (establish de minimis write-off amounts (now with or without if AFS), M & S, others) 5

6 First Discussion Topic The In-house Issues 8. The new annual elections that taxpayers will have to make 9. The in-house processes that you have to create or purchase to be able to properly manage these TPR issues, not limited to Policies and procedures Tracking Communications Sources documents Templates and tools Education and resources 10. Realize that you now only have two tax filing seasons in which to do this effort 6

7 The Final Main TPR Issues/Subjects Overview On Friday, September the 13th, 2013 the IRS released 1. The final TPRs, removed the temporary TPRs for periods past 2013, issued new regulations governing the application of Code Secs. 162(a) and 263(a) to amounts paid to acquire, produce, or improve tangible property. 2. Also, final regulations were issued under Sec. 167 regarding accounting for and retirement of depreciable property, as well as 3. Proposed regs. under Sec. 168 regarding dispositions of property under MACRS, and general asset accounts 7

8 The Final Main TPR Issues/Subjects Overview The preamble states that the new regulations take into account various pieces of the temporary and proposed regulations (PRs), comments received on those regulations, and court case decisions in an attempt to simplify the prior rules while achieving results consistent with the case law The IRS is trying to match the principles and findings of the court cases 8

9 The Final Main TPR New Provisions Are Not Elections First Most of the new final and PR TPRs are not elections, but rather are method changes first Example For the Safe harbor for routine maintenance on property (1.263(a)-2(i)(1) one has to first have the applicable final TPR method change filed first Change procedures for the final TPRs are expected to be issued in October

10 Depreciation Allowable or Taken This Issue Is HUGE Points 1. Use 2013 (i.e. tax depreciation schedules as of ) to correct any errors in prior year depreciation, and 2. Section remains part of the TPRs for a reason that is the scary part the IRS will use this in their audits of TPs to deny depreciation deductions 10

11 A Warning About Depreciation from the TPR Issue What is the amount of depreciation that a TP can take in a given tax year? Ask yourself Why was this new section included in the tangible property regs (Temporary (T) and Final (F))? To emphasize the fact that in depreciation deductions you use it or lose it 11

12 Warnings for Advisors, If 1. An attorney, CPA, etc. does not identify all of the tangible property issue(s), 2. A TP does not implement the rules correctly, AND 3. File all of the necessary 3115s under the correct new method(s), 12

13 Warnings The TPs could have certain current and future tax depreciation denied and/or miss the potential write-off on previously capitalized assets This exposure is greatest for depreciation and related building issues, since that is where the greatest dollar amounts exist Advisor s exposure for depreciation errors is great and the time to execute is limited (i.e. a few tax years) and data gathering is a consideration 13

14 What the Repair Regulations Do Temporary and Final tangible property regulations (TPR) provide guidance ( Framework ) on the application of sections 162(a) (deduction) and 263(a) (requires capitalization) of the Code to amounts paid to acquire, produce, or improve tangible property Regulations aim to clarify the difference between these two opposites 14

15 What the Repair Regulations Do Temporary regulations = generally, one that is law and has to be followed until the final regulations are issued (general rule but not for the TPRs) Unusual treatment for the TPRs = one can apply the temporary or the final TPRs (but adopt temporary only through the end of 2013) 15

16 Index of Regulation Sections Final and Proposed (PRs) = Materials and supplies = Repairs (rules for amounts paid or incurred for repairs and maintenance) 1.263(a)-1 = Capital expenditures; in general 1.263(a)-2 = Amounts paid to acquire or produce tangible property 1.263(a)-3 = Amounts paid to improve tangible property 16

17 Index of Regulation Sections Final and Proposed (PRs) 1.263(a)-6 = Election to deduct or capitalize certain expenditures 1.168(i)-1 = GAA 1.168(i)-8 = Dispositions of MACRS property Are effective for taxable years beginning on or after January 1, 2014, with earlier application permitted 17

18 Background 263(a) Regulations state that capital expenditures include amounts paid or incurred to Add to the value, or substantially prolong the useful life, of property owned by the TP, or Adapt the property to a new or different use Amounts paid or incurred for incidental repairs and maintenance of property (as defined by 162 and (relating to the deduction for ordinary and necessary trade or business expenses) are not capital expenditures under 1.263(a)-1 18

19 Temporary or Final Regulations Do Not Change 263(a) Which requires TPs to capitalize amounts paid to improve tangible property and 263A and the regulations under 263A Which require TPs to capitalize the direct and allocable indirect costs, including the cost of materials and supplies, to property produced or to property acquired for resale Which requires TPs to include in inventory certain materials and supplies 1016 on use it or lose it rule 19

20 Final Regulations (and PRs) Have Numerous Examples See Appendix B for the Final Regulations, where we supply them, organized in order into the following numeric categories 1. Examples of (Materials and Supplies) 2. (P) Examples of 1.168(i)-1(c) (Establishment of General Asset Accounts) 3. (P) Examples of 1.168(i)-1(e)(2) (GAA General rules for a disposition) 4. (P) Examples of 1.168(i)-1T(e)(3)(ii) (GAA Special rules Disposition of all assets remaining in a GAA) 5. (P) Examples of 1.168(i)-1T(e)(3)(iii) (GAA Special rules Disposition of an asset in a qualifying disposition) 6. (P) Examples of 1.168(i)-8 (Dispositions of MACRS property) 20

21 Final Regulations (and PRs) Have Numerous Examples 7. Examples of amounts paid to sell property (1.263(a)-1(e)) 8. Examples of de minimis safe harbor election (1.263(a)-1(f) [NEW SECTION FOR FINAL] [Moved from 1.263(a)-2T of the temporary] 9. Examples of amounts paid to acquire or produce tangible property (1.263(a)-2(d)) 10. Examples of amounts paid for defense or perfection of title to tangible property ( 1.263(a)-2(e)) 11. Examples of transaction costs (1.263(a)-2(f) 12. Examples of recovery of capitalized amounts ( 1.263(a)-2(h)) [NEW] 21

22 Final Regulations (and PRs) Have Numerous Examples 13. Example of coordination with other provisions of the Code ( 1.263(a)-3(c)) [NEW] 14. Examples of determining the Unit of Property (1.263(a)-3(e)) 15. Examples of improvements to leased property (1.263(a)-3(f)) 16. Examples of special rules for determining improvement costs (1.263(a)-3(g)) 17. Examples of safe harbor for small taxpayers (1.263(a)-3(h)) [NEW] 18. Examples of safe harbor for routine maintenance on property (1.263(a)-3(i)) [NEW] 22

23 Final Regulations (and PRs) Have Numerous Examples 19. Examples of capitalization of betterments (1.263(a)-3(j) 20. Examples of capitalization of restorations (1.263(a)-3(k) 21. Examples of capitalization of amounts to adapt property to a new or different use (1.263(a)-3(l) 22. Example of optional regulatory accounting method ( 1.263(a)-3(m)) 23. Example of election to capitalize repair and maintenance costs ( 1.263(a)-3(n)) [NEW] 24. Example of exhaustion, wear and tear, obsolescence, amortization, and depletion 23

24 The F and P TPR 6 Potential New Annual Elections The final and proposed TPRs have six new annual elections including 1, 2, 3: Three that enable a TP to capitalize and depreciate (certain M & S, amounts paid for employee compensation or overhead as amounts that facilitate the acquisition of property, and/or capitalize R & M costs) 24

25 The F and P TPR New Annual Elections Although the method changes are not issued, it seems clear that the next two of these annual elections do NOT require method changes first.. 4. De minimis safe harbor election ( (f)(1)) A TP with and without an AFS may not capitalize any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under (a) any amount paid in the taxable year for tangible property if the amount specified meets the rules $500 and $5,000 per invoice respectively 25

26 Application of the de minimis to TPR Issues De minimis applies to all of these Rules for materials and supplies Repairs and maintenance 1.263(a)-1 General rules for capital expenditures 1.263(a)-2 Rules for amounts paid for the acquisition or production of tangible property 1.263(a)-3 Rules for amounts paid for the improvement of tangible property 26

27 Visual Depiction of the Interaction of De Minimis to M & S and UoP Items First Before we advance into the details of these main TPR issues, let s summarize the interaction of the de minimis safe harbors and a) material and supplies (M&S); b) repairs and maintenance (R & M); c) UoP (Unit of Property) with lives less than one year, and d) UoP with lives greater than one year Note that I did not use the term class lives, but rather used the term lives There is a difference 27

28 Visual Application of the Final TPR Regulation and De Minimis Safe Harbors No DMSH M&S UoP I NI < One year life > One year life Cost Per Item < $200 WO WO WO WO >$200 but < $500 NA Defer CAP CAP >$500 but < $5,000 NA Defer CAP CAP > $5,000 NA Defer CAP CAP Codes: I= Incidental, NI= Non-incidental UoP= Unit of Property (Acquisition) DMSH= de minimis safe harbor 28

29 Visual Application of the Final TPR Regulation and De Minimis Safe Harbors Non- AFS DMSH M&S UoP I NI < One year life > One year life Cost Per Item < $200 WO WO WO WO >$200 but < $500 NA WO WO WO >$500 but < $5,000 NA Defer CAP CAP > $5,000 NA Defer CAP CAP Codes: I= Incidental, NI= Non-incidental UoP= Unit of Property (Acquisition) DMSH= de minimis safe harbor 29

30 Visual Application of the Final TPR Regulation and De Minimis Safe Harbors AFS DMSH M&S UoP I NI < One year life > One year life Cost Per Item < $200 WO WO WO WO >$200 but < $500 NA WO WO WO >$500 but < $5,000 NA WO WO WO > $5,000 NA Defer DEFER CAP Codes: I= Incidental, NI= Non-incidental UoP= Unit of Property (Acquisition) DMSH= de minimis safe harbor 30

31 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg Final (can apply to 2012 and 2013 but must apply 2014 and after) de minimis safe harbor Ceiling has been eliminated New safe harbor determined at invoice item level, but same on policies for books and records If AFS, TP may rely on de minimis safe harbor only if the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice This amount is subject to change by the IRS in future guidance 31

32 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg The de minimis safe harbor has been expanded to include amounts paid for property having an economic useful life of less than 12 months, provided the amount per invoice or item does not exceed $5,000 A $500 per item de minimis rule is also included for taxpayers without an AFS, but still have to have accounting procedures in place to deduct amounts paid for property costing less than a specified amount, or amounts paid for property with a life of 12 months or less If cost exceeds $500 per invoice, no portion will qualify for the safe harbor 32

33 FS required to be filed with the SEC Certified audited FS Used for credit purposes Reporting Other substantial non-tax purpose Defined as financial statements that have the highest priority 33 FS required to be provided to the federal or a state government or agencies Other than the SEC or IRS

34 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg The de minimis safe harbor does not preclude a TP from reaching an agreement with the IRS that the IRS examining agents will not review certain items Same rule as in the temporary TPRs Examining agents do not need to revise their materiality thresholds in accordance with the safe harbor limitations The de minimis safe harbor is elected annually by including a statement on the TP's tax return for the year elected The annual election to use the safe harbor may not be made through the filing of an application for change in accounting method 34

35 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg If an invoice includes amounts paid for multiple tangible properties and the invoice includes additional invoice costs related to the multiple properties, then the taxpayer must allocate the additional invoice costs to each property using a reasonable method The de minimis safe harbor must be applied to all eligible M & S (other than rotable, temporary, and standby emergency spare parts subject to the election to capitalize or to rotable and temporary spare parts subject to the optional method of accounting for such parts) if the TP elects the de minimis safe harbor 35

36 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg TPs that do not elect the de minimis safe harbor must treat amounts paid for materials and supplies in accordance with Reg TPs subject to 263A can not avoid those provisions by using the de minimis Safe harbor does not apply to inventory, land, items it capitalizes, and the optional method of rotable parts Safe harbor is deducted as ordinary and necessary expense 36

37 De Minimis Safe Harbor Reg (f) and 1.263(a)-1(f) Repairs Reg (Effective Dates) Except for the de minimis election, changes apply to taxable years on or after If doing the de minimis election, it will only apply to transactions after Even for the de minimis election, a TP may choose to adopt to amounts paid or incurred in taxable years on or after Transition rule for de minimis election on 2012 and 2013 returns apply A TP may choose to apply the temporary de minimis rules for 1.263(a)-1T for 2012 or

38 The F and P TPR New Annual Elections 5. Safe harbor for small taxpayers (SHST) (1.263(a)-3(h)(1) A TP may elect not to capitalize improvements or repairs to an eligible building property ) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building property = (=each UoP) does not exceed the lesser of 2% of the unadjusted basis of the eligible building property; or $10,000 The $10k INCLUDES amount under the DMSH and RMSH If you go over the SH $$ then not available for that property Taxpayer must have annual tax gross receipts averaging less than $10M (the TP's receipts for the taxable year that are properly recognized under the TP s methods of accounting used for Federal income tax purposes) 38

39 Safe Harbor for Small Taxpayers Reg (a)-3(h) Certain TPs may elect to not apply the capitalization requirements to an eligible building property if the total amount paid during the taxable year for R & M, improvements, and similar activities performed on the eligible building property does not exceed the lesser of i. 2 percent of the unadjusted basis (is defined in (h)(5) with special rules for leased property) of the eligible building property; or ii. $10,000 Amount paid do not include items capitalized under de minimis safe harbor or those amounts deemed not to improve under the safe harbor for routine maintenance 39

40 Safe Harbor for Small Taxpayers Reg (a)-3(h) Qualifying TP (i) In general the term qualifying TP means a TP whose average annual gross receipts for the three preceding taxable years is less than or equal to $10,000,000 Rules for TPs in existence for less than three years Short year annualize Gross receipts are defined in the F TPRs 40

41 Safe Harbor for Small Taxpayers Reg (a)-3(h) Election Attach a statement to the TP s timely filed original return for the taxable year in which amounts are paid for R & M, improvements, and similar activities performed on the eligible building property providing that such amounts qualify under the safe harbor 41

42 Safe Harbor for Small Taxpayers Reg (a)-3(h) Safe harbor exceeded If total amounts paid by a qualifying TP during the year for R & M, improvements, and similar activities performed on an eligible building property exceed the safe harbor limitations, then the safe harbor election is not available for that eligible building property and the TP must apply the general improvement rules 42

43 Partial Asset P TPR New Annual Election This is now an election but if the TP wants to apply to prior years, it must be a method change first 6. Disposition of a portion of an asset (aka partial disposition election) ( 1.168(i)-8(d)(2) A taxpayer may make an election under this paragraph (d)(2) to apply this section to a disposition of a portion of an asset Must make the election by the due date (including extensions) of the original federal tax return for the taxable year in which the portion of an asset is disposed of by the TP This listing does not include the numerous GAA elections addressed in the PRs 43

44 The Proposed MACRS Disposition Regulations Disposition Rules address Structural Components Partial Dispositions Assets Not Included in General Asset Accounts (GAAs) Partial Dispositions Assets Included in GAAs Components Disposition Definition GAAs Qualifying Disposition Election. Basis and Identification of Disposed or Converted Asset Single Asset Account 44

45 Disposition Rules for MACRS Structural Components The proposed regulations (PR) change the rule in Temp Reg (i)-1T and 1.168(i)-8T that each structural component of a building, condominium, or cooperative is the asset for tax disposition purposes The PR provide that a building (including its structural components), a condominium (including its structural components), or a cooperative (including its structural components) is the asset for disposition purposes 45

46 Disposition Rules for MACRS Structural Components This rule change, if finalized, allows TPs to forgo a loss upon the disposition of a structural component of a building without making a general asset account (GAA) election as required under the temporary regulations A TP desiring to claim a loss on a retired structural component outside of a GAA is now required to make a partial disposition election This is a new term and is further described in following slides 46

47 Partial Dispositions Assets Not Included in General Asset Accounts The PRs allow a TP to claim a loss upon the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a component (or a portion thereof) of any other asset (a partial disposition of an asset) without identifying the component as an asset before the disposition by making a partial disposition election 47

48 Partial Dispositions Assets Not Included in General Asset Accounts While the partial disposition rule is generally elective, the rule is required to be applied to Disposition due to casualty event Disposition of a portion of an asset for which gain is not recognized in whole or part under 1031 or 1033 Sale or transfer of a portion of an asset 48

49 Disposition Definition The proposed regulations define disposition to provide that a disposition includes the disposition of a structural component (or a portion thereof) of a building only if the partial disposition rule applies to the structural component (or a portion thereof) 49

50 Basis and Identification of Disposed or Converted Asset Temporary Reg (i)-1T and 1.168(i)-8T provide that, where it is impracticable from the TP s records to determine the unadjusted depreciable basis of the disposed-of asset, the TP may use any reasonable method that is consistently applied to the taxpayer s general asset accounts, multiple asset accounts, or larger assets Final retain these rules but explain them better 50

51 Basis and Identification of Disposed or Converted Asset The PRs provide examples of reasonable methods 1. Discounting the cost of the replacement asset to its placedin-service year cost using the CPI; 2. A pro rata allocation of the unadjusted depreciable basis of the GAA or multiple asset account, as applicable, based on the replacement cost of the disposed-of asset and the replacement cost of all of the assets in the general asset account or multiple asset account, as applicable; and 3. A study allocating the cost of the asset to its individual components Look at examples 7, 8, 9 from set #6 (page 11) 51

52 Unit of Property (UoP) Is a very important element to these and other regulations Does the client first need to change its UoP before it makes a method change under the new TPRs? 52

53 Unit of Property UoP is a very important issue, why? It is an important criteria in the decision whether a TP can write off an expenditure as a R & M Generally The smaller the UoP the more likely the expenditure has to be capitalized This issue should almost always be considered in TR issues, most of the time, early If your current UoP does not match what you need/want to do you must an accounting method change to get it corrected (T method 162, F is?) 53

54 Rules for Determining a UoP 1.263(a)--3(e) for Final For property other than buildings Defines a UoP as consisting of all the components of the UoP that are based upon the functional interdependent standard, but there are special rules for Plant equipment, network assets, leased property, and improvements to property Additional rules if A TP has assigned different MACRS classes or depreciation methods to components of property, or Subsequently changes the class or depreciation method of a component 54

55 Unit of Property (UoP) for Buildings 1.263(a)-3(e)(2) Building Structure Building Systems (9) Defines building systems to include 1) the heating, ventilation, and air conditioning systems ( HVAC ); 2) the plumbing systems; 3) the electrical systems; 4) all escalators; 5) all elevators; 6) the fire protection and alarm systems; 7) the security systems; 8) the gas distribution systems; and 9) any other systems identified in published guidance 55

56 Building and Structural Components 1.263(a)-3(e)(2) Final General rule that the UoP for a building is T: comprised of the building and its structural components F: each building and its structural components 56

57 Building and Structural Components 1.263(a)-3(e)(2) Improvements to a building F: Requires that a TP apply the improvement rules separately to the building structure (a building structure consists of the building and its structural components, other than the structural components designated as building systems) or its building systems (these are separate from building structure, and to which the improvement rules must be applied) A UoP is a method of accounting 57

58 Building and Structural Components 1.263(a)-3(e)(2) Defines the building structure as F: each building and its structural components (as defined in (e)(2)) is a single unit of property ( building ) A cost is treated as a capital expenditure if it results in an F: improvement to building structure or any of the building systems 58

59 Building and Structural Components for Partial Dispositions (1.168(i)-8(d)(2) The proposed regulations (PR) change the Unit of property rule in Temp Reg (i)-1T and 1.168(i)-8T that each structural component of a building, condominium, or cooperative is the asset for tax disposition purposes The PR provide that a building (including its structural components), a condominium (including its structural components), or a cooperative (including its structural components) is the asset for disposition purposes 59

60 Materials and Supplies Reg The F TPRs expand the definition of M & S to include property that has an acquisition or production cost of $200 or less (increased from $100), clarify application of the optional method of accounting for rotable and temporary spare parts, and simplify the application of the de minimis safe harbor to M & S Add a new definition for standby emergency spare parts Add a new election to capitalize and depreciate M & S but limit that capitalize choice to only rotable, temporary, and standby emergency spare parts 60

61 Repairs Reg Is a simple, straightforward rule, that is the opposite of capitalization Amounts paid for repairs and maintenance to tangible property are deductible if the amounts paid are not required to be capitalized under Reg (a)-3 Same rule as from temporary TPRs A change to comply with this is a change in method of accounting to which the provisions of Sections 446 and 481 and the accompanying regulations apply No examples in Final TPRs 61

62 Amounts Paid to Acquire or Produce Tangible Property Reg (a)-2 Temporary TPRs provided rules for 263(a) to amounts paid to acquire or produce a unit of real or personal property These rules are generally retained in the final TPRs Requirements to capitalize amounts paid to acquire or produce, To capitalize amounts paid to defend or perfect title and The de minimis safe harbor was moved to 1.263(a)-1(f) to reflect its broader application to amounts paid for tangible property, including amounts paid for improvements and M & S, except for those subject to 263A 62

63 Amounts Paid to Improve Tangible Property Reg (a)-3 This final TPR section covers the following sections d) Provides the requirement to capitalize amounts paid to improve tangible property and provides the general rules for determining whether a unit of property (UofP) is improved e) Rules for determining the UofP f) Rules for leasehold improvements g) Rules for determining improvement costs in particular contexts, including indirect costs incurred during an improvement, removal costs, aggregation of related costs, and regulatory compliance costs 63

64 Amounts Paid to Improve Tangible Property Reg (a)-3 This final TPR section covers the following sections h) safe harbor for small taxpayers i) safe harbor for routine maintenance costs j) whether amounts are paid for betterments to UoP k) whether amounts are paid to restore the UoP l) rules for amounts paid to adapt the UoP to a new or different use n) an election to capitalize R & M consistent with books and records o) and (p) the treatment and recovery of amounts capitalized under this section q) and (r) accounting method changes and state the effective/applicability date for the rules in this Section 64

65 Amounts Paid to Improve Tangible Property Reg (a)-3(d) Requirement to capitalize amounts paid for improvements A TP generally must capitalize the related amounts paid to improve a UoP owned by the TP A UoP is improved if the amounts paid for activities performed after the property is placed in service by the TP 1. Are for a betterment to the UoP 2. Restore the UoP or 3. Adapt the UoP to a new or different use 65

66 Improvements to Leased Property Reg (a)-3(f) TP can apply either the safe harbor for small taxpayers or de minimis safe harbor to leased property A TP lessee must capitalize the related amounts that it pays to improve a leased property except to the extent that section 110 applies to a construction allowance received by the lessee for the purpose of such improvement or when the improvement constitutes a substitute for rent A TP lessee must also capitalize the related amounts that a lessor pays to improve a leased property if the lessee is the owner of the improvement 66

67 Special Rules for Determining Improvement Costs Reg (a)-3(g) Certain costs incurred during an improvement A TP must capitalize all the direct costs of an improvement and all the indirect costs (including, for example, otherwise deductible repair costs) that directly benefit or are incurred by reason of an improvement Indirect costs arising from activities that do not directly benefit and are not incurred by reason of an improvement are not required to be capitalized under Section 263(a), regardless of whether the activities are performed at the same time as an improvement 67

68 Special Rules for Determining Improvement Costs Reg (a)-3(g) Removal Costs If a TP disposes of a depreciable asset, including a partial disposition under Prop. Reg (i)-1(e)(2)(ix), and has taken into account the adjusted basis of the asset or component of the asset in realizing gain or loss, then the costs of removing the asset or component are not required to be capitalized If a TP disposes of a component of a UoP, but the disposal of the component is not a disposition, then the TP must deduct or capitalize the costs of removing the component based on whether the removal costs directly benefit or are incurred by reason of a repair to the UoP or an improvement to the UoP 68

69 Safe Harbor for Routine Maintenance (RM) Reg (a)-3(i) An amount paid for RM on a unit of tangible property, or in the case of a building, on any of the properties is deemed not to improve that UoP RM for a building is the recurring activities that a TP expects to perform as a result of the use to keep the building structure/system in its ordinarily efficient operating condition 69

70 Safe Harbor for Routine Maintenance Reg (a)-3(i) RM activities include The inspection, cleaning, and testing of the building structure or each building system, and The replacement of damaged or worn parts with comparable and commercially available replacement parts RM may be performed any time during the useful life of the building structure or building systems 70

71 Safe Harbor for Routine Maintenance Reg (a)-3(i) The activities are routine only if performed more than once during the 10-year period beginning when placed in service Factors to be considered? Include the recurring nature of the activity, industry practice, manufacturers recommendations, and the TP s experience with similar or identical property With respect to a TP that is a lessor of a building or a part of the building, the TP s use of the building UoP includes the lessee s use of its UoP 71

72 Safe Harbor for Routine Maintenance Reg (a)-3(i) RM for property other than buildings is the recurring activities that a TP expects to perform as a result of the TP s use of the UoP to keep the UoP in its ordinarily efficient operating condition The activities are routine only if, at the time the UoP is placed in service by the TP, the TP reasonably expects to perform the activities more than once during the class life (i.e. the ADS class life) of the UoP 72

73 Safe Harbor for Routine Maintenance Reg (a)-3(i) RM does NOT include betterments, replacements where the TP took a loss, sold it, casualty loss, deteriorated to disrepair, new or different use, etc. Examples are in Appendix B, examples set #18 73

74 Capitalization of Betterments Reg (a)-3(j) An amount is a betterment to a UoP only if it: Ameliorates a material condition or defect that either existed prior Is for a material addition, including a physical enlargement, expansion, extension, or addition of a major component to the unit of property or a material increase in the capacity Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output 74

75 Capitalization of Betterments Reg (a)-3(j) (slide 2) Application of betterment rules The applicability of each quantitative and qualitative factors to a particular UoP depends on the nature of the UoP For example, if an addition or an increase in a particular factor cannot be measured in the context of a specific type of property, this factor is not relevant in the determination of whether an amount has been paid for a betterment to the UoP An amount is paid to improve a building if it is paid for an increase in the efficiency of the building structure or any one of its building systems (for example, the HVAC system) 75

76 Capitalization of Betterments Reg (a)-3(j) (slide 3) Appropriate comparison In cases in which an expenditure is necessitated by normal wear and tear or damage to the UoP that occurred during the TP s use of the UoP, the determination of whether an expenditure is for the betterment of the UoP is made by comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure Examples are in Appendix B, examples set #19 76

77 Capitalization of Restorations Reg (a)-3(k) A TP must capitalize as an improvement an amount paid to restore a UoP, including an amount paid to make good the exhaustion for which an allowance is or has been made An amount restores a UoP only if it Is a replacement where TP deducted a loss, taken into account the basis in a sale, casualty loss 77

78 Capitalization of Restorations Reg (a)-3(k) Returns the UoP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use; Rebuilds the UoP to a like-new condition after the end of its class life Is for the replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a UoP 78

79 Capitalization of Restorations Reg (a)-3(k) The IRS must have thought that this was an important section as it has 30 examples (#20) Replacement of loss and sold components, Restoration after casualty loss and casualty event Restoration in a state of disrepair Rebuild to a like new condition before and after the end of class life Not a rebuild to a like-new condition Replacement of major component or substantial structural part Repair performed during restoration Numerous examples of not and replacement of major component or substantial structural part Replacement of major component or substantial structural part; windows and floors 79

80 Capitalization of Amounts to Adapt Property to a New or Different Use Reg (a)-3(l) A TP must capitalize as an improvement an amount paid to adapt a UoP to a new or different use An amount is paid to adapt a UoP to a new or different use if the adaptation is not consistent with the TP s ordinary use of the UoP at the time originally placed in service by the TP Just like in the sections on betterments, restorations, there are no accounting method changes required to adopt Examples are in Appendix B, examples set #21 80

81 Accounting Method Changes for 1.263(a)-3 A change to comply with this section is a change in method of accounting to which 446 and 481 and the accompanying regulations apply A TP seeking to change to a method of accounting in 1.263(a)-3 must secure the consent of the IRS 81

82 Accounting Method Changes for 1.263(a)-3 Applies to taxable years on or after , except for (h) the safe harbor for small taxpayers, (m) the optional regulatory method, and (n) the election to capitalize R & M apply to amounts paid on or after Except for (h), (m), and (n), a TP may choose to apply this section to taxable years beginning on or after A TP may choose to apply (h), (m), and (n) to amounts paid in taxable years beginning on or after

83 Temporary to Final Transition New Elections As the final regulations are generally applicable to and after, several sections of the final permit TPs to adopt certain new final TPR elections for 2012 or 2013, by filing an amended Federal tax return for the applicable taxable year on or before 180 days from the due date including extensions of the taxpayer s Federal tax return for the applicable taxable year, notwithstanding that the taxpayer may not have extended the due date 83

84 CONCLUSION