Are you Prepared For The Final Tangible Property Repair Regulations?

Whether your business is a sole proprietorship, “C” or “S” corporation, partnership, LLC or if you have rental property, the new repair regulations rules and requirements will apply.

The final tangible property repair regulations must be applied at the beginning of the 2014 calendar tax year, however, taxpayers may be able to expense greater amounts by applying some of the final rules to the 2012 or 2013 tax years.

As discussed in our previous blog, in order to utilize the de minimis safe harbor election, a capitalization policy should have been in place by January 1, 2014 for calendar year taxpayers. We have also identified a list of suggestions that should be considered during the process of determining if expenditures should be capitalized or expensed as a repair under the final tangible property repair regulations.

  1. Understand the various annual elections available for 2014 calendar year taxpayers.
    1. The election to capitalize certain material and supplies.
    2. The de minimis safe harbor election
    3. The election to capitalize employee compensation and/or overhead costs
    4. The small taxpayer safe harbor election
    5. The election to capitalize repair and maintenance costs
    6. The partial disposition election
  2. When an expenditure is incurred, determine if the routine maintenance safe harbor applies.  If applicable, the expenditure can be treated as an expense.
  3. Identify the Unit of Property (UOP) if the routine maintenance safe harbor, de minimis safe harbor election and small taxpayer safe harbor election do not apply.
  4. Once you can identify the UOP, understand the BAR test that will be utilized to determine if the expenditure improved the UOP.
    1. (B)- Betterment
    2. (A)- Adaptation
    3. (R)- Restoration
  5. If you made improvements during the year, identify the entire asset or the portion of an asset that was replaced during the year. Are the removal costs that were incurred separately identified?
  6. Have you “cleaned-up” your 2013 depreciation schedule in order to comply with the repair regulations? The 2013 tax depreciation schedule should be reviewed to determine if there is considerable benefit to disposing duplicated assets listed on the fixed asset schedule.  In addition, fixed assets that can be considered a repair should be removed from the depreciation schedule. A3115, change in accounting method, will be necessary to “clean-up” the depreciation schedule.
  7. Understand the revised definition of material and supplies. Do you have a process in place to capture your “non-incidental material and supplies”?
  8. In 2014, capitalized assets should be identified and tracked based on their unit of property.
  9. Consider a cost segregation study for new acquisitions or recent acquisitions to assist with the identification of a UOP and to accelerate the depreciation deduction for short lived assets.

While the final tangible property repair regulations rules are more favorable to taxpayers, interpreting and complying with them will be burdensome for many taxpayers. Please contact an Anders advisor if you have any questions on how the final tangible property repair regulations will impact your business.