TANGIBLE PROPERTY REGULATIONS

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1 A BerryDunn Expert Webinar Presented by: Matthew Litz, JD, LLM, CPA Brooke Libby, CPA GAIN CLARITY TANGIBLE PROPERTY REGULATIONS GAIN CONTROL berrydunn.com

2 Brooke Libby, CPA LinkedIn.com/in/brookeholmeslibby Matthew Litz, JD, LLM, CPA LinkedIn.com/in/matthewlitz 2

3 TODAY S OBJECTIVE Help taxpayers who acquire, produce, or improve tangible property understand the implications to their business. What Yesterday and today We ll cover When How Rules take effect How you need to respond? Your questions 3

4 FIXED ASSET LIFECYCLE Acquisition Capitalization PIS Classification Disposition 4

5 GETTING UP TO SPEED Inconsistent application of rulings and case law Temporary and proposed regulations, December 2011 Final regulations and re-proposed regulations, September

6 BRIDGING THE GAP Automatic consent for method changes Scope limitations waived Audit protection for prior years 6

7 GENERAL FRAMEWORK Materials and Supplies Disposition Costs Acquisition or production costs Improvement costs 7

8 Issue Old New Materials & Supplies $100 or less $200 or less Materials & Supplies De Minimis Safe Harbor Election Small Taxpayer Safe Harbor Routine maintenance Safe Harbor Capitalization Election Elect to include under the de minimis rule Lesser of.1% of tax gross receipts or 2% of book depreciation Excluded buildings Must include when applying the de minimis rule $5,000 with an AFS or $500 without an AFS Lesser of 2% of unadjusted basis or $10,000 Includes buildings Elect to capitalize repairs Dispositions Partial disposition election 8

9 MATERIALS AND SUPPLIES A component used to maintain or improve tangible property Consumables (fuel, water, etc.) w/useful life <12 months Property with acquisition or production costs < $200 9

10 COSTS TO ACQUIRE OR PRODUCE TANGIBLE PROPERTY Capitalize amounts to: Acquire or produce a unit Defend or protect title Facilitate acquisition or production of real or personal property 10

11 COSTS TO ACQUIRE TANGIBLE PROPERTY Transaction costs Moving and reinstallation costs Work performed prior to placing in service 11

12 DEDUCTION OPTION: DE MINIMIS RULE Applies to property < $5,000 with applicable F/S Applies to property < $500 without applicable F/S 12

13 DE MINIMIS SAFE HARBOR WITH AFS Cost per Item Incidental Materials & Supplies Non-incidental Materials & Supplies Acquired Property From $200 to $500 Deduct Deduct From $500 to $5,000 Deduct Deduct Greater than $5,000 Capitalize Capitalize 13

14 COSTS TO IMPROVE TANGIBLE PROPERTY Identify unit of property Apply improvement standards Routine maintenance safe harbor 14

15 IMPROVEMENT STANDARDS Capitalizable Improvement Betterment Restoration Adaptation 15

16 ROUTINE MAINTENANCE SAFE HARBOR Amounts paid for recurring activities expected to be performed to keep the unit of property in its ordinary efficient operating condition are not considered improvements Routine maintenance is an activity that the taxpayer reasonably expects to perform more than once during the class life of the unit of property Does not apply to amounts capitalized as betterments, adaptation, and certain restorations 16

17 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 unadjusted basis of the property 17

18 DISPOSITIONS New proposed regulations will affect ALL taxpayers who dispose of MACRS property Partial disposition election requires change in accounting method 18

19 GENERAL ASSET ACCOUNT (GAA) Partial dispositions of assets in a GAA: Casualty event Disposition for which gain is not recognized under Section1031 or 1033 A step in the shoes transaction Sale of portion of asset A transaction described under anti-abuse rules 19

20 TAKE ACTION TO GET THINGS MOVING CORRECTLY FOR YOUR BUSINESS 20

21 INTERESTED IN MORE? We re available for questions. Brooke Libby, CPA LinkedIn.com/in/brookeholmeslibby Matthew Litz, JD, LLM, CPA LinkedIn.com/in/matthewlitz 21