TANGIBLE PROPERTY REGULATIONS

Transcription

1 November 6, 2014 Matthew C. Litz, BerryDunn Jonathan McDonald, BerryDunn TANGIBLE PROPERTY REGULATIONS berrydunn.com

2 FIXED ASSET LIFECYCLE Acquisition Capitalization PIS Classification Disposition 2

3 AGENDA History Transition guidance Materials and supplies Costs to acquire and produce tangible property Costs to improve tangible property Dispositions Next steps 3

4 HISTORY Inconsistent application of rulings and case law Notice issued December 2003 Proposed regulations issued August 2006 Re-proposed regulations issued March 2008 Temporary and proposed regulations released December 2011 Final tangible property regulations issued September 2013 Final regulations on dispositions of property issued August

5 EFFECTIVE DATES Final regulations are effective for tax years beginning on or after January 1, 2014 Transition guidance issued: Rev. Proc Rev. Proc Rev Proc

6 TRANSITION GUIDANCE Automatic consent for method changes to comply with temporary regulations (Form 3115s due by extended due date of the return for the tax year of change) Scope limitations waived Taxpayers receive audit protection for prior years upon filing national office copy of Form 3115 Taxpayers file a single Form 3115 for all concurrent changes covered under the respective revenue procedures 6

7 GENERAL FRAMEWORK Materials and supplies Costs to acquire or produce tangible property Costs to improve tangible property Dispositions 7

8 MATERIALS AND SUPPLIES 8

9 MATERIALS AND SUPPLIES Under the regulations, materials and supplies are defined as tangible property used or consumed in the taxpayer s operations that is not inventory and is: A component acquired to maintain, repair, or improve a unit of tangible property Fuel, lubricants, water, or similar items that are reasonably expected to be consumed in 12 months or less A unit of property that has an economic useful life of 12 months or less A unit of property with an acquisition or production cost less than $200; or Property identified in published guidance 9

10 MATERIALS AND SUPPLIES (CONTINUED) Final regulations increase the dollar threshold for characterizing property as materials and supplies to $200 Option to make an election to capitalize and depreciate certain materials and supplies Consider the de minimis safe harbor 10

11 COSTS TO ACQUIRE OR PRODUCE TANGIBLE PROPERTY 11

12 COSTS TO ACQUIRE OR PRODUCE TANGIBLE PROPERTY Capitalize amounts to: Acquire or produce a unit of real or personal property Defend or protect title to a unit of real or personal property Facilitate the acquisition or production of real or personal property 12

13 COSTS TO ACQUIRE TANGIBLE PROPERTY Transaction costs Moving and reinstallation costs Work performed prior to placing in service 13

14 TRANSACTION COSTS 2008 Proposed Regulations provided that a taxpayer must capitalize amounts paid to facilitate the acquisition or production of real or personal property Real property deductible pre-decisional costs Reasonable allocation rule 14

15 MOVING AND REINSTALLATION COSTS Temporary regulations provide that costs of moving and reinstalling a unit of property that result in an improvement to the property are required to be capitalized Final regulations clarify that removal costs are not required to be capitalized if a taxpayer disposes of the asset 15

16 WORK PERFORMED PRIOR TO PLACED IN SERVICE The temporary and final regulations retain the rule in the 2008 regulations providing that acquisition costs include costs for work performed on property prior to the placed in service date and must be capitalized 16

17 DE MINIMIS RULE The final regulations provide a de minimis rule that allows amounts properly expensed under a taxpayer s financial accounting policies be deductible for tax purposes A taxpayer with an applicable financial statement may rely on the 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 17

18 DE MINIMIS RULE A taxpayer without an applicable financial statement may rely on the de minimis safe harbor only if the amount paid for property does not exceed $500 per invoice, or per item as substantiated by the invoice An annual election is required 18

19 APPLICABLE FINANCIAL STATEMENT Notice The definition of applicable financial statement requires preparation of the statement in accordance with U.S. GAAP and use of the statement in filings with the SEC or with any agency of the Federal government other than the Service. IRS Announcement Financial statement required to be filed with Securities and Exchange Commission ( SEC ) (the 10-K or the Annual Statement to Shareholders); Certified audited financial statement used for (in this priority) credit purposes, reporting to shareholders, or other substantial non-tax purposes; and Financial statement provided to a government regulator other than the SEC or the Internal Revenue Service. 19

20 COSTS TO IMPROVE TANGIBLE PROPERTY 20

21 COSTS TO IMPROVE TANGIBLE PROPERTY Identify the unit of property Apply the improvement standards Routine maintenance safe harbor 21

22 UNIT OF PROPERTY Buildings The building and its structural components Plant Property Functional interdependence Network Assets Based on facts and circumstances Leased Property The leased building and the structural components under the lease 22

23 IMPROVEMENT STANDARDS Capitalizable Improvement Betterment Restoration Adaptation 23

24 BETTERMENT Ameliorates a material condition or defect that existed prior to the taxpayers acquisition of the unit of property or arose during the production of the unit of property A material addition including a physical enlargement or expansion Reasonably expected to materially increase capacity, productivity, efficiency, strength, or quality of the unit of property or its output 24

25 RESTORATION 1. Amount paid for the replacement of a component of a unit of property and the taxpayer has deducted a loss for that component 2. Amount paid for the replacement of a component of a unit of property and the taxpayer has taken a basis adjustment 3. Amount paid for the repair of damage to a unit of property for which the taxpayer has taken a basis adjustment as a result of a casualty loss 25

26 RESTORATION (CONTINUED) 4. Amount paid to return a unit of property to its ordinary efficient operating condition if the property has deteriorated to a state of disrepair and was no longer functional for its intended use 5. Amount paid results in the rebuilding of the unit of property to a like new condition after the end of its economic useful life 6. Amount paid is for the replacement of a major component or a substantial structural part of a unit of property 26

27 ADAPTATION Taxpayers must capitalize amounts that adapt a unit of property to a new or different use An amount is paid to adapt a unit of property to a new or different use if the adaptation is inconsistent with the taxpayer s intended, ordinary use of the unit of property at the time originally placed in service by the taxpayer 27

28 ROUTINE MAINTENANCE SAFE HARBOR Amount paid is deemed to not improve the unit of property if it is for recurring activities that a taxpayer expects to perform as a result of the taxpayer s use of the unit of property to keep the unit of property in its ordinary efficient operating condition Routine maintenance is an activity that the taxpayer reasonably expects to perform more than once during the class life of the unit of property 28

29 ROUTINE MAINTENANCE SAFE HARBOR (CONTINUED) For buildings, routine maintenance is an activity that the taxpayer reasonably expects to perform more than one during a 10 year period of time Does not apply to amounts capitalized as betterments, adaptation, and certain restorations 29

30 SAFE HARBOR FOR SMALL TAXPAYERS The final regulations provide a safe harbor election for building property held by taxpayers with gross receipts of $10,000,000 or less Eligible building property includes a building that is owned or leased, provided that the unadjusted basis of the building is $1,000,000 or less The taxpayer may elect not to apply the improvement rules if the total amount paid during the year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2% of the adjusted basis of the property 30

31 ELECTION TO CAPITALIZE REPAIR AND MAINTENANCE COSTS The final regulations permit a taxpayer to elect to capitalize amounts paid during year for repairs and maintenance and subject to depreciation Taxpayer must treat the amounts as capital expenditures on its books and records 31

32 DISPOSITIONS New regulations will affect all taxpayers that dispose of MACRS property A taxpayer may make a partial disposition election for a disposition of a portion of any type of MACRS property. However, the taxpayer must classify the replacement portion of the asset under the same asset class as the disposed portion of the asset 32

33 DISPOSITIONS IRS allows for reasonable method for determination of basis of the component being disposed if determining basis is impracticable from the taxpayer s records The method must be consistently applied Nonexclusive examples include: Discounting the cost of the replacement asset using the Producer Price Index (PPI) Pro rata allocation of the basis based on the replacement cost A study allocating the cost 33

34 DISPOSITIONS If the IRS disallows a repair deduction for a replacement of an asset, the taxpayer may make a partial disposition election by filing an application for change in accounting method. 34

35 DISPOSITIONS In many cases the partial disposition rule is elective The partial disposition rule is required as a result of: Casualty event Disposition for which gain is not recognized under Section1031 or 1033 A step in the shoes transaction described in Section 168(i)(7)(B) Sale of a portion of an asset 35

36 GENERAL ASSET ACCOUNT (GAA) Partial dispositions of assets in a GAA will apply in the following transactions: Casualty event Disposition for which gain is not recognized under Section1031 or 1033 A step in the shoes transaction described in Section 168(i)(7)(B) Sale of a portion of an asset A transaction described under the anti-abuse rules applicable to general accounts 36

37 GENERAL ASSET ACCOUNT (GAA) Partial dispositions will also be allowed where: An election is made to terminate the GAA upon disposition of all assets in the GAA, or By making a qualifying disposition election 37

38 HOW TO ADDRESS THE NEW TANGIBLE PROPERTY REGULATIONS 38

39 HOW TO ADDRESS THE TANGIBLE PROPERTY REGULATIONS Determine what needs may be required for financial reporting purposes Review capitalization policies Evaluate the impact of the new provisions Prepare required Form 3115s and related adjustments Update fixed asset schedules 39

40 INTERESTED IN MORE? We re available for questions. Matthew Litz, JD, LLM, CPA Jonathan McDonald, CPA, MST 40