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Important IRS Regulation Changes Regarding Tangible Property

On September 19, 2013 the Internal Revenue Service (IRS) finalized tangible property regulations on repair deductions and capitalization of expenditures related to tangible property. These regulations will have a wide range and direct effect on businesses in all industries that acquire, produce, replace, or improve tangible property. They will generally apply to taxable years beginning on or after January 1, 2014. The underlying impact for most businesses is the requirement to file Forms 3115 “Application for Change in Accounting Method” to implement the regulations.

A key aspect to the final regulations is the ability for a taxpayer in many instances to apply a safe harbor or de minimis amount to expense various costs such as materials and supplies and repairs and maintenance. However, to utilize the de minimis safe harbor the taxpayer is required to have a written expensing policy in place by January 1, 2014 that clearly states the threshold for which items will be expensed or capitalized for book purposes. If you have an applicable financial statement (AFS), property costing $5,000 or less can be expensed. If you do not have an AFS, property costing $500 or less can be expensed. We have linked to sample expensing policies for your reference. These are only samples and you may want to consult with legal counsel as appropriate. You need a written policy in place by December 31, 2013. This is very important! Please provide us a copy of your policy by December 31, 2013.

We have also included a link to a summary of other key aspects to the new tangible property regulations for your reference and understanding. In order for us to ensure that each of our clients will be in compliance with these new regulations by the effective date, we will be working with your fixed asset information to determine the impact to your organization and to ensure that you are ready to implement these regulations in just a few short months. This analysis is needed of your current fixed asset schedules to determine the impact of the new regulations and the preparation of the required Forms 3115. This will result in an investment of time and related fees to comply with the new IRS regulations. The IRS procedures allow you to apply these rules retroactively and claim any missed deductions using Forms 3115. One example of a benefit under the new regulations is writing off the undepreciated balance of a building component, such as a roof, that is replaced. These changes are considered “Automatic Change of Accounting Method” and do not require amending any income tax returns or IRS application fees.

It is important that all taxpayers comply with these regulations. If a taxpayer does not comply with the regulations, it could result in permanent lost deductions in future years as well as create a greater risk of audit by the IRS. If you would like to discuss the regulations in further detail, please feel free to call us.

Tangible Property Regulation Highlights
Sample Policy for Companies with AFS
Sample Policy for Companies without AFS

IRS Circular 230 disclosure – As required by IRS rules, although this written communication may address certain tax issues, the issuer of this document, along with any attachments, did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this document use this document’s written tax advice for that purpose. Nor may it be used to promote, market or recommend to another party any transaction or matter addressed herein.