final irs tangible property regulations – how will they ... · final irs tangible property...
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October 16, 2013 I 2 - 3 p.m. CST
Final IRS Tangible Property Regulations –How Will They Affect Your Business?
Rick KlahsenPartnerBKD, LLP
Robert ConnerNational Tax Assistant DirectorBKD, LLP
Scott HumphreyNational Tax Assistant DirectorBKD, LLP
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AGENDA
• Overview• Materials & Supplies• Asset acquisitions• Improvements• New proposed disposition rules• Action steps• Questions
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RECENT HISTORY OF THE REGULATIONS
• Temporary Regulations issued on December 23, 2011o Effective January 1, 2012
• Delayed on November 20, 2012 o Changes to regulations announcedo New effective date of January 1, 2014
• Reissued final & proposed regulations September 13, 2013o Still effective January 1, 2014o Early adoption optionso Additional guidance expected
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WHAT CHANGED?
• New de minimis safe harbor• Materials & supplies threshold• Small taxpayer safe harbor• Routine maintenance safe harbor for buildings• Disposition rules• General asset accounts
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WHAT STAYED THE SAME?
• Improvement rules• Unit of property definition• Routine maintenance safe
harbor for property (other than buildings)
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MATERIALS & SUPPLIES
• Tangible property used & consumed in the taxpayer’s operations that is not inventory &
o Is a component acquired to maintain, repair or improve a unit of tangible property
o Consists of fuel, lubricants, water & similar items reasonably expected to be consumed in 12 months or less
o Is a unit of property with an economic useful life of 12 months or less
o Is a unit of property with a cost of $200 or less oro Identified as a material & supply in other IRS published guidance
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OTHER DEFINITIONS
• Incidental supplieso No records maintainedo Example, office supplies
• Rotable & temporary spare parts• Standby emergency spare parts
o Used as replacement partso Directly related to particular
machineryo Normally expensiveo Not repaired or reusedo Not interchangeable
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MATERIALS & SUPPLIES – KEY CHANGES
• Election to capitalize & depreciate limited to rotable, temporary or emergency spare parts
• Reduced confusion on rotable spare parts• Clarified relationship between materials & supplies & de
minimis safe harbor• Increased dollar amount for
UOP from $100 to $200
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DE MINIMIS SAFE HARBOR
• Removed ceiling calculation• Annual election• New safe harbor based on invoice (or item)
o Final regulations contain anti-abuse rule
• Must have written capitalization policy as of first day of tax year
• Rotable, temporary & emergency spare parts not eligible for de minimis safe harbor
• If de minimis safe harbor used, taxpayer must apply it to materials & supplies as well
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DE MINIMIS SAFE HARBOR
• Applicable Financial Statement (AFS)o Financial statement filed with SECo Certified audited financial statemento Financial statement required to be provided to federal/state
government or agency
• Taxpayers with AFS o $5,000 per invoice (or item)o Must expense in AFS
• Taxpayers without an AFSo $500 per invoice (or item)
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EXAMPLE # 1
• Taxpayer has an AFS• Written capitalization policy of
$2,500• Purchased 500 computers for
$1,000,000 including shipping• Entire amount deductible under de
minimis safe harbor
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EXAMPLE # 2
• Taxpayer does not have an AFS• Written capitalization policy of $2,000• Purchased 100 drill presses for $100,000
including shipping• Entire amount is required to be capitalized for
tax purposes• Still allowed to be deducted on books & records
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ACQUISITION COSTS
• Capitalize costs that facilitate an acquisitiono 11 specifically identified inherently facilitative costs
• Real property investigatory costs• Employee costs & overhead
o Election to capitalize
• Contingency fees
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WHEN DO I CAPITALIZE AN IMPROVEMENT?
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DETERMINE IF EXPENDITURE IS IMPROVEMENT
Betterment Restoration Adaptation
IDENTIFY UNIT OF PROPERTY
Buildings Plant Property Network Assets Functional Interdependence
POTENTIAL EXCEPTIONS TO CAPITALIZATION
Routine Maintenance Safe Harbor
De Minimis Safe Harbor Small Taxpayer Safe Harbor
IF EXCEPTIONS DO NOT APPLY THEN PROCEED
ROUTINE MAINTENANCE SAFE HARBOR
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• Buildingso Reasonably expected to occur more than
once during a 10-year period
• Property other than buildingso Reasonably expected to occur more than
once during class life of property
• Does not apply too Bettermentso Adaptation oro Items for which a partial disposition or
casualty loss has occurred
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SMALL TAXPAYER SAFE HARBOR
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• Average annual gross receipts of $10 million or less • Applies to buildings with unadjusted basis of $1 million or
less• Expense building improvements• Lesser of
o $10,000 oro 2 percent of unadjusted basis of
the building
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WHEN DO I CAPITALIZE AN IMPROVEMENT?
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DETERMINE IF EXPENDITURE IS IMPROVEMENT
Betterment Restoration Adaptation
IDENTIFY UNIT OF PROPERTY
Buildings Plant Property Network Assets Functional Interdependence
POTENTIAL EXCEPTIONS TO CAPITALIZATION
Routine Maintenance Safe Harbor
De Minimis Safe Harbor Small Taxpayer Safe Harbor
IF EXCEPTIONS DO NOT APPLY THEN PROCEED
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UNIT OF PROPERTY
• Functional interdependence standard• Special rules for
o Buildings Building structure Building system
o Plant propertyo Network assetso Leased property
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FUNCTIONAL INTERDEPENDENCE
• Functional interdependence standardo Applies if not already definedo Placing in service one component is dependent upon another
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BUILDINGS
• Building Structureo Includes building shell & anything not included in a system
• Building Systemso HVAC Systemso Plumbing Systemso Electrical Systemso Escalatorso Elevatorso Fire-protection & alarm systemso Security systemso Gas distribution systemso Other systems identified in published IRS guidance
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PLANT PROPERTY
• Functionally interdependent machinery or equipment• Unit of Property
o Further divided into components that perform a discrete & major function
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WHEN DO I CAPITALIZE AN IMPROVEMENT?
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DETERMINE IF EXPENDITURE IS IMPROVEMENT
Betterment Restoration Adaptation
IDENTIFY UNIT OF PROPERTY
Buildings Plant Property Network Assets Functional Interdependence
POTENTIAL EXCEPTIONS TO CAPITALIZATION
Routine Maintenance Safe Harbor
De Minimis Safe Harbor Small Taxpayer Safe Harbor
IF EXCEPTIONS DO NOT APPLY THEN PROCEED
WHAT IS AN IMPROVEMENT?
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Improvement
Adaptation1. New or different use not
consistent with intended ordinary use at time UOP is placed into service
Restoration1. Replacement of component
deducted for loss or included in adjusted basis for realizing gain/loss
2. Returns UOP to ordinary efficient operating condition if property has deteriorated to state of disrepair & is no longer functional for intended use
3. Rebuild UOP to like-new condition after end of class life
4. Replacement of part(s) that comprise major component or substantial structural part of UOP
Betterments1. Ameliorates material
condition or defect existing prior to acquisition or during production of UOP
2. Material addition to UOP3. Material increase in
capacity, productivity, efficiency, strength , quality or output of UOP
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CAPITALIZING REPAIRS & MAINTENANCE
• Annual election to capitalize repairs & maintenance expense
• Applies to all amounts capitalized for financial reporting purposes
• Adds conformity between book & tax
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DISPOSITIONS
• Disposition occurs when ownership of asset is transferred or when asset is permanently withdrawn from use either in the taxpayer’s trade or business or in production of income
Fixed asset life cycle
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Asset Acquisition
Capitalization versus
Expense
Asset Placed in Service for Depreciation
Disposition: Asset Taken Off Books
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DISPOSITIONS – GUIDANCE FOR DECISIONS
2012 or 2013 Dispositions
2013 Prop. Reg Guidance
Temp Reg Guidance
Pre-Temp Reg
Guidance
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2014 Dispositions
Final Guidance
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DISPOSITIONS – CHANGES FROM TEMP REGS
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Temporary Regulations Proposed Regulations
• Mandatory gain/loss recognition upon disposition of building structural component
• Any reasonable valuation method permitted to determine basis
• General Asset Accounting definition expanded to include retirement of building structural component
• Optional annual partial dispositionelection to recognize gain/loss upon disposition
• Examples of reasonable valuation methods to determine basis
• Qualifying disposition rules for general asset accounts only include extraordinary partial dispositions
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DISPOSITIONS – PARTIAL DISPOSITION ELECTION
• Definition of disposition is modified to include retirement of a structural component (or portion thereof) of a building if partial disposition election is made
• For assets not included in general asset account, partial disposition rule is mandatory when
o The disposition of a portion of asset results from casualty evento The disposition of a portion of asset results in deferred gain
under Sections 1031 or 1033o The transfer of a portion of asset is considered a step-in-the-
shoes transaction o A portion of asset is sold
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DISPOSITIONS – CONSIDERATIONS
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Capitalized Repair, i.e.,
Improvement
Elect Partial Disposition
Rule
Write-Off Old Basis & Depreciate New
Cost
No Partial Disposition
Election
Depreciate Old Basis & New Cost
Deductible Repair e.g., de minimis rule, routine maintenance safe-harbor, or
not betterment/restoration/adaptation
Continue to Depreciate Old Basis
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DISPOSITIONS – PARTIAL DISPOSITION ELECTION
• Partial disposition election made in taxable year in which disposition occurs
• Late election may be made through accounting method change only when on exam, repair deduction is recharacterized as capital improvement
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DISPOSITIONS – DETERMINING ASSET BASIS
• For partial dispositions When specific identification of unadjusted depreciable basis is impractical, i.e., disposition asset is a component of larger asset—use any reasonable, consistent method to determine basis of disposition
• The following are nonexclusive reasonable methods from proposed regulations
o Discounting cost of replacement asset to its placed-in-service year cost using Consumer Price Index
o A study allocating cost of asset to its individual components
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DISPOSITIONS – PARTIAL DISPOSITION EXAMPLE
• July 1, 2011 – $20,000,000 multistory officebuilding placed in service
• June 30, 2014 – Elevator replaced/partialdisposition election
• Discounted cost of replacement elevator toJuly 1, 2011 using CPI = $150,000
• Depreciation allowed or allowable throughJune 30, 2014 on retired elevator = $11,221
• Partial disposition election results in $138,779loss on retired elevator ($150,000 - $11,221)
• Capitalization required for replacementelevator
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DISPOSITIONS – GENERAL ASSET ACCOUNTS
• No loss on disposition recognized until all assets in GAA disposed of
o Limited qualified disposition availability
o Gain/loss recognized on disposition of all or last asset in GAA
• Special rules for partial dispositions of assets included in a GAA
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GAA ELECTION FOR OWNER OR LESSEE OF REAL PROPERTYNO LONGER GENERALLY RECOMMENDED BECAUSE OF NEW
PARTIAL DISPOSITION RULES
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WHAT YOU NEED TO DO NOW
• Meet with BKD tax advisoro Tailor rules to you
• Discern written capitalization policyo Revisit expensing thresholds
• Inventory existing repair expense versus capitalization methods
o Document decision processes
• Scrub depreciation scheduleso Potential additional tax write-offs
• Prepare strategy – accounting method changes
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Questions?
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Thank You!
Rick Klahsen | Partner | 816.221.6380 | [email protected] Conner | National Tax Assistant Director | 417.831.4763 | [email protected] Humphrey | National Tax Assistant Director | 417.831.4763 | [email protected]
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