The IRS issued long-awaited regulations effective for tax years beginning on or after January 1, 2014 that create guidelines for treatment of both real and tangible personal property (TPP). These regulations will affect taxpayers in every industry that own depreciable capital assets, have repairs and maintenance, or materials and supplies. All businesses and any individuals that file a Schedule C or E will be affected and must comply with these new regulations. As currently written, the new regulations are complex and present onerous compliance requirements that will significantly increase the amount of compliance work required for the 2014 tax filings.
These new tangible property regulations (TPRs) provide guidance on the capitalization of costs incurred to acquire real and TPP, the expensing of materials and supplies, deductibility of repairs and maintenance, and partial dispositions of duplicate portions of property. The good news is that taxpayers who have significant fixed assets or real property with remaining depreciation will typically have large current and future tax deductions. Taxpayers also have an opportunity to reexamine their fixed assets by reviewing prior years' depreciation schedules to see if any capitalized property is eligible to be expensed or written off.
The TPRs allow taxpayers to elect a safe harbor and deduct as expenses all items with value below a certain threshold ($500 without an audited financial statement and $5,000 with an audited financial statement). Safe harbors are also available for routine maintenance to property owners with $10 million or less in revenues and buildings with an unadjusted basis of $1million or less. The safe harbor allows deductions for repair and maintenance of up to $10,000 or two percent of the unadjusted basis of the building.
Due to the complexity of the new regulations, understanding how they impact your business is critical to maximizing tax deductions while maintaining tax compliance. Generally, these safe harbor elections are implemented by filing statements on a timely filed federal tax return. However, the IRS considers the remaining provisions to be accounting method changes. The IRS will grant automatic consent of an accounting change provided the taxpayer accurately completes Form 3115 Change in Accounting Method, attaches the form to a timely filed tax return (with extensions), and files a signed copy with a designated IRS Office.
In response to feedback from numerous professional organizations such as the AICPA, the IRS has issued additional guidance relating to small businesses. The IRS has granted an exception from these new regulations for small business taxpayers with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. The exception requires taxpayers to comply with the regulations on a prospective basis and may eliminate the need to file Form 3115. While this eases the burden on filing Form 3115, additional time is required to determine which elections apply. However, additional guidance may be forthcoming from the IRS and we will keep you apprised as new information becomes available.
For more information on this topic, please contact your local UHY LLP professional.