Tangible property regulations A discussion about taxpayer considerations
How will your company finish?
Final and proposed tangible property regulations The regulations affect all taxpayers with tangible property and require compliance via Form 3115 and/or annual elections. They are generally effective for tax years beginning on or after January 1, 2014 (optional early adoption for 2012 and/or 2013 years). Materials and supplies (M&S) Acquisitions Improvements GAA and dispositions 1.162-3 (final) 1.263(a)-1 and -2 (final) 1.263(a)-3 (final) 1.168(i)-1, -8 (proposed) Definition of M&S A unit of property $200 Used or consumed in 12 months or less Replacement parts Fuel, lubricants, etc. Or Identified as M&S in other IRS guidance Timing for deducting M&S Incidentals (no record of consumption or physical inventory) when acquired Non-incidentals (including emergency spare parts) when consumed Rotable and temporary spare part, when disposed Limited annual election to capitalize certain M&S Interaction with de minimis safe harbor De minimis safe harbor Annual election to follow book expense policy If have AFS, no more than $5,000 per invoice or item If no AFS, no more than $500 per invoice or item Only if written book policy in place at beginning of year Capitalize costs that facilitate acquisitions 11 inherently facilitative costs Safe harbor annual election to expense Employee compensation and overhead Investigatory costs for real property Unit of property (UOP) definition functionally interdependent property except for: Buildings Plant property Network assets Leased property Improvement defined Betterment Restoration New or different use Safe harbor to expense routine maintenance Buildings: if more than once over 10- year period Non-buildings: if more than once over class life Annual election to follow book by capitalizing repairs General asset accounts (GAA) Establish GAAs with assets of similar depreciation methods Qualifying dispositions do not include partial dispositions (e.g., structural components of a building) Dispositions (not in GAA) Optional annual election to recognize partial dispositions (e.g., building structural components) Reasonable valuation method to determine disposition gain or loss Coordination of dispositions with IRS examination of repairs 1
Implementing the regulations Fixed asset Financial accounting Tax return filings Controversy support Compa objectiv Ernst & Yo Key considerations Compliance Policies, systems, processes and controls Most-efficient compliance Process simplifications going forward UNICAP and cost recovery Planning Strategically staging implementation from 2013 14 Leveraging the rules to accelerate deductions and generate cash Integrating earnings and profits planning Engineering Documentation Proce syste improve Technology Typical time frame 2013 implementation options May continue to use current methods May implement temporary rules (section by section) May early-adopt final rules (section by section) 2014 and beyond Must apply final rules 2013 2014 A S O N D J F M A M J J A Release of final and proposed regulations 13 September 2013 1 January 2014 Final effective date Book de minimis policy must be in writing by 1 January 2014 Release of Transition Guidance (automatic accounting method changes) Rev. Proc. 2014-16 Final TPR Regulations (10 new method changes) + 2 new UNICAP changes for self-constructed assets Rev. Proc. 2014-17 Proposed Depreciation & Disposition Regulations (5 new method changes) + modifications to 6 existing method changes 2
ny es ung LLP Real estate Current state assessment Financial statement implications Construction Determine impact on other tax positions (e.g., 199) and tax provision Understand your company s expense practices Determine necessary changes to comply with the regulations Current state assessment Understand the regulations and provisions Identify current tax methods for reporting expense ss/ m ents Implementation Operations Information S O N D J F M A M J J A S 2015 Implementation deadline for 2013 15 September 2014 extended due date for 2013 tax return Implementation deadline for 2014 15 September 2015 extended due date for 2014 tax return Tax department available to work on implementation Tax department unavailable tax provision, tax returns, holidays and vacation 3
How we can help It is essential for taxpayers to consider their individual facts and circumstances as they assess the impact of the regulations on their business, define their objectives in addressing the regulations and implement actions associated with those objectives. Ernst & Young LLP can help in every step of this process. Flexible Insightful Efficient Sustainable Our focus in serving clients is to offer a practical and flexible approach. We work collaboratively with our clients to shape and understand their objectives within the confines of the tax law. We work together to achieve those objectives, ranging from essential compliance with the regulations to advising on and implementing value-added tax planning opportunities presented by the regulations. National, regional and local tax professionals have deep technical knowledge, industry acumen, practical experiences and good working relationships with government officials. This provides Ernst & Young LLP with an unmatched ability to work with our clients to identify, evaluate and implement leadingedge alternatives when addressing challenging issues within the regulations. Extracting, analyzing, computing and reporting data is a significant aspect of implementing the regulations. Complexities are likely to arise at one or several of these stages. Through Ernst & Young LLP s quantitative and qualitative technology tools, coupled with our sophisticated use of statistical sampling, we help to reduce these complexities by offering efficient data extraction, streamlined analysis and quality documentation of services. Building a self-sustaining process is key to any plan of compliance that we recommend and implement for our clients. Equally important is that our approach and interpretations used as part of that process can be sustained under Internal Revenue Service (IRS) exam. Ernst & Young LLP s Tax Controversy and Risk Management professionals are an essential part of our client-serving team. Their reputation within the IRS National Office and among IRS technical specialists and local exam teams is unparalleled. Their assistance provided to Compliance Assurance Process (CAP) taxpayers as they implement the regulations has provided, and will continue to provide, highly relevant experience and insights into the IRS approach to auditing and resolving issues concerning the tangible property regulations. Ernst & Young LLP consistently delivers an experienced team with a proven track record, one that knows the tax law and tax code, is knowledgeable in industry issues and has an unmatched history of working with Treasury, the IRS and CAP participants. By working together with our clients, we achieve innovation and transformation of the tax function, delivering what your business needs on time, with accuracy and at a fair cost. We convert your challenges into opportunities. 4
Flexible Insightful Efficient Sustainable That s our approach
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member of EYGM in the US. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. 2014 Ernst & Young LLP. All Rights Reserved. SCORE no. YY3269 1403-1221714 ED None