Understanding New IRS Regulations for Tangible Property
The IRS released final regulations for tangible property in September 2013 and, more recently, the final regulations for Modified Accelerated Cost Recovery System (MACRS) dispositions in August 2014. These regulations were issued to give taxpayers guidance on amounts paid for materials and supplies, repairs and maintenance, and/or purchases of assets that require capitalization. The final regulations apply to tax years beginning January 1, 2014; all taxpayers, including those who qualify for an extension, must be in compliance with these regulations at the 2014 tax return due date.
With these regulations, the IRS has provided several safe harbors for taxpayers on buildings, equipment, and materials and supplies, which will ultimately provide taxpayers with numerous tax-savings opportunities.
Defining the “Unit of Property”
An important term within the regulations is “Unit of Property,” which is used when determining which items on buildings and equipment should be capitalized or expensed. How we define the Unit of Property for a building or equipment is key: it could impact whether an item is capitalized as an improvement or expensed as a repair.
Writing off replacements
The regulations on MACRS dispositions allow for taxpayers to write off previously capitalized and depreciated portions of assets that have now been replaced, such as when a taxpayer replaces the roof on a previously capitalized building in the current year. The IRS now allows a portion of the building’s original cost to be allocated to the old roof (using any reasonable method that is consistently applied) and have any remaining basis written off in the year of replacement. Per the regulations, “any reasonable method” could include a producer price index rollback, a cost segregation study, or an engineering study.
Filing Accounting Method Changes
Compliance with these regulations may require Accounting Method Changes to be filed with your 2013 or 2014 tax returns. But it’s important to take action now: A window of opportunity exists to retroactively apply these regulations and take deductions in the current year for previously capitalized items that—under new regulations—may now be expensed.
Please contact your tax professional to discuss how these regulations may affect your business, your 2014 tax filings, and potential tax savings for both current and prior tax years.
Judd Nordquist, CPA, is AEM’s Construction/Real Estate Industry Leader. When he’s not hunting down ways to help clients improve their bottom lines, he’s hunting for pheasants with his trusty canine companion. Judd can be reached at 952.939.3204 or firstname.lastname@example.org.