Do you own buildings, fixed assets, or use materials and supplies in your business? Taking full advantage of the tax implication is essential to your success.
Own buildings, fixed assets, or use or consume materials and supplies in your business?
In September of 2013 the IRS finalized new regulations governing whether taxpayers must capitalize or expense costs to acquire, improve, maintain, and replace tangible property. The regulations are effective for tax years beginning on or after January 1, 2014.
These new regulations apply to you if you own buildings, fixed assets, or use or consume materials and supplies in your business. The time for compliance is now. Taxpayers must be in compliance by the time they file their 2014 tax returns.
Potential Benefits of Compliance
While the new regulations for Tangible Property can be quite cumbersome, there are potentially advantages that can be realized through compliance:
- Immediate deduction for assets that were historically depreciated over too long of a life or missed bonus depreciation
- Clearer definitions of repairs vs. capital expenditures could mean immediate write-off for fixed assets that should have been treated as repairs
- The IRS filing fee (currently $7,000) for related accounting method changes has been waived. What does this mean to you? It is a “free” catch-up for past treatment and to file accounting method change forms to get into compliance with the new regulations.
- Certain elections can be made on the tax return for safe harbor thresholds and amounts paid for routine maintenance
- IRS audit protection. The IRS has stated publicly that they expect most taxpayers to have to file one or more Forms 3115, Change in Accounting Method, to get in compliance
- Adoption of a Fixed Capitalization Policy can lead to quicker write-offs.
Key Areas Affected
- Materials and supplies
- Repairs and Maintenance
- Disposals of Fixed Assets
- Capitalization thresholds
- Rotable Spare Parts
To What types of Taxpayers Do the Regulations Apply?
- Sole Proprietors (Schedule C)
- Rentals (Schedule E)
- Disregarded Entities
What is the Process?
The process has two phases:
Phase 1 Analysis
This entails a background review to go over internal processes related to tangible assets and an analysis of the fixed asset depreciation schedule. From there we will communicate what the potential changes are and how many Form 3115’s would need to be filed.
Phase 2 Documentation and Implementation
This step is where invoice support would be pulled to verify any deductions vs. capitalization of assets, implement the findings by updating the fixed asset system, calculate the adjustments and prepare the Form 3115’s, and provide assistance with changing internal processes to ensure compliance with the new regulations going forward.
What Records are Required to Get Started?
- Federal Tax depreciation report for the most recent year-end
- General ledger detail for repairs and maintenance for current and 3 prior years
If You Have Materials and Supplies … A Prospective Change
It is likely that nearly ALL taxpayers will need to file a Form 3115 to adopt the final regulations governing the treatment of materials and supplies. The definition of materials and supplies contained in the final regulations did not exist prior to the release of the temporary regulations. Therefore, it is unlikely that taxpayers already have an established method of accounting that is in accordance with the final regulations.
- $200 per-item threshold for materials and supplies, unless taxpayer elects de minimis safe harbor expensing rules
- Election to capitalize materials and supplies is limited to rotable, temporary and standby emergency spare parts
- A unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations
- The regulations, strictly applied, require a taxpayer to capitalize the cost of materials and supplies used to improve a unit of property even though the taxpayer previously deducted the cost in the year paid or incurred (incidental materials and supplies) or in the year originally used or consumer (non-incidental materials and supplies)