Tangible Property/Repair Regs Resources

[Lee B]

Copied from the website of the Maryland Society of CPA s:

 

Posted By: Bill Sheridan on January 22, 2015 in Taxation

 

That didn’t take long.

 

Tax season has only just begun, and the MACPA’s federal tax listserv is already lighting up with questions from tax pros.

 

The issue at hand involves the IRS’s tangible property regulations. The final disposition rules for tangible property were issued in August and largely adopted the proposed regulations that were issued in 2013.  The IRS also recently issued procedural guidance, but if the listserv is any indication, a ton of questions still remain.

 

The MACPA is working on digging up some answers, possibly in the form of CPE programs and other guidance to address the issue. Stay tuned.

 

In the mean time, here are a few resources that might provide some answers.

• AICPA resources: Tax treatment of expenditures related to tangible property resources
•  
• FAQ: Forms 3115 and the new tangible property regulations
•  
• IRS updates accounting method change procedures
•  
• IRS Rev. Proc. 2015-13
•  
• IRS Rev. Proc. 2015-14
•  
• AICPA: Repair regulations’ de minimis safe harbor is set too low
•  
• Regulations govern dispositions of depreciable property
•  
• The five actions for IRS tangible property ‘repair’ regulations
•  
• It’s not too late to save tax via IRS tangible property regs

Post By:

 

[Elrod]

Thanks, CBSLEE

[jklcpa]

Pinning this topic. If anyone has additional references that they've found to be very helpful in this area, please add the links.

[Lion EA]

Excel worksheet is free; booklet is $20 but worth it:

 

http://brasstax.com/3115%20Booklet.htm

 

Lisa Ihm is a great speaker if you have the opportunity to hear her live or even take a home study course.

[kcjenkins]

I like that spreadsheet !

[Lee B]

Copied from the website of Nichols Patrick CPE :   A Very Good Overview of Repair Regs

 

The latest round of revisions to the repair and capitalizations have made their was our of the IRS , but this time the majority of the regulations issued as final regulations (TD 9636, https://s3.amazonaws.com/public-inspection.federalregister.gov/2013-21756.pdf) with the regulations under IRS §168(i) reissued as proposed regulations with further revisions (REG 110732-13,https://s3.amazonaws.com/public-inspection.federalregister.gov/2013-21753.pdf).

 

Late in 2012 the IRS had issued Notice 2012-73 which delayed the effective date of then temporary regulations. The notice also indicated specifically that the IRS expected to make changes to simplify compliance and the notice provides that such changes are to be expected in the following provisions:

 

– De Minimis Rule:§ 1.263(a)-2T(g);

– Dispositions:§§ 1.168(i)-1T and 1.168(i)-8T; and

– Safe Harbor for Routing Maintenance:§ 1.263(a)-3T(g)

 

The final regulations apply to tax years beginning or after January 1, 2014, though taxpayers may elect to apply the provisions to years beginning on or after January 1, 2014.

As well, taxpayers may elect to apply the provisions of the 2011 temporary regulations to tax years beginning on or after January 1, 2012 and before January 1, 2014.

 

Significant changes in the final regulations as compared to the 2011 temporary regulations are discussed below:

 

Materials & Supplies

The temporary regulations provided as one of the defined types of “materials and supplies” under Reg.§1.162-3 any unit of property that had a cost of $100 or less. The final regulations raise that amount to $200 – still relatively low, but at least a more workable number than the $100 limit.

 

In the temporary regulations this number had a special significance for most taxpayers due to limitation on a second optional test that could be used to classify an item as “materials and supplies” and thus not subject to the general capitalization rules of IRC §263(a) The de minimis method allowed a limited recognition of an organization’s capitalizations policy used for accounting and financial reporting purposes.

 

The rule was far from perfect, being subject to an overall aggregate limit that effectively required tracking any item expensed due solely to the capitalization policy, meaning that an entity had to account for these items, although the purpose of the accounting policy on capitalization generally was to reduce the administrative burden of tracking such items.

But even more significant was a second problem – the de minimis election was only available to a taxpayer with an “applicable financial statement” as defined by the temporary regulations.

 

De Minimis Rule Changes

The IRS noted the criticism they received over the de minimis election and did make certain changes. What the IRS did was create two elective rules. The election that applies to a taxpayer depends upon whether the taxpayer has an applicable financial statement. The IRS also moved the rule form Temporary Reg. §1.263(a)-3T to Reg. §1.263(a)-1, admitting that the rule applies not only to improvements ( as opposed to repairs), but also to acquisition, due to its inclusion in the materials and supplies regulations.

 

The definition of an applicable financial statement remained unchanged in the final regulations. A taxpayer’s applicable financial is the first financial statement, listed below, which the taxpayer has for the year in question. If the taxpayer does not have any of these statements, the taxpayer does not have an applicable financial statement and will face a modified limitation.

 

 

Applicable financial statements are:
– A statement filed with the Securities and Exchange Commission;

– A statement audited by an independent CPA that is used for credit purposes, reporting to equity holder or for any substantial non-tax purpose or

– A statement other than a tax return required to be provided to an agency of the federal or state government ( other than the IRS or SEC)

 

The IRS considered, but rejected, adding financial statements for which a SSARS review report has been issued by a CPA. The IRS argued that since a review does not require that there be analysis and testing of an entity’s internal control, it did not serve to address the potential problem the IRS saw with entities failing to consistently follow the policy or insure the policy did not distort financial reporting.

 

Both entities with and without an applicable financial statement must still have in place as of the first day of the tax year ( thus for a calendar year taxpayer, as of January 1, 2014) a written accounting procedure in place treating all purchases of assets below a certain level as an expanse for nontax purposes.

 

The entity must also follow that policy. For an entity with an applicable financial statement, the expense treatment must be reflected in the applicable financial statement. For entities without such statement, the amount must be treated as an expense on the accounting books and records of the entity.

 

A complaint about the 2011 temporary regulation’s de minimis rule for those organizations that could use it was that require detailed tracking of the assets in question. That was because the entity has to test the items that were not capitalized due to the accounting policy to insure, in total, the amounts did not exceed the greater of .01% of gross receipts reported on the tax return or 2% of depreciation and amortization expense reported on the applicable financial statement.

 

Commentators complained that this testing requirement defeated the entire non-tax purpose behind these accounting procedures – that is, not to have to waste time tracking and accounting for numerous low value assets. To comply with the 2011 temporary regulations a significant amount of accounting personnel time would be spent analyzing and tracking these “below the capitalization level” purchases.

 

In response to that complaint, and to come up with a method to b used by taxpayers without an applicable financial statement, the IRS dropped the aggregate tests and instead went to a per asset “invoice cost” test.

 

Assets that are expensed per the capitalization policy in place at the beginning of the year, which are reflected as an expense on the applicable financial statement or in books and records ( as applicable to the taxpayer) will not be tested against the capitalization regulations if the invoice price of each individual asset is less that:

– $5000 for an organization with an applicable financial statement

– $500 for an organization with out an applicable financial statement

 

The overall result if these changes is that organizations with written and consistently applied capitalization policies will be able to treat items costing less than $500 )(or $5000 if they have an applicable financial statement) as materials and supplies or repairs if the organization makes the de minimis election.

 

If the organization does not have such a statement of fails to make the election (which must be made on the taxpayer’s return via a statement attached), the “protected” expenditure amount drops to $200.

 

While the regulations themselves do not mention it, the preamble to the final regulations reminds taxpayers and, rather explicitly, agents that amounts expended beyond this level do not automatically need to be capitalized- or even that a higher capitalization policy cannot be justified, Rather, such policies must be tested to see if they materially misstate income.

 

De Minimis Small Taxpayer Real Estate Safe Harbor

Another criticism of the de minimis rule in the 2011 temporary regulations was that it did not apply to real property. The IRS responded to this criticism in a limited fashion, creating a small taxpayer real estate de minimis safe harbor expenditure limitation which the taxpayer may elect apply.

 

First, the rule only applies to taxpayers with average gross receipts of less than $10 million in the prior three years (thus the “small taxpayer” part of the rule). Second, the rule only applies to a building whose unadjusted basis is $1,000,ooo or less. If the taxpayer is leasing the building, then the total of all lease payments ( including a reasonable period of renewal based on the terms of the contract) is used for the $1,000,000 test.

 

If the taxpayer qualifies, then we end up with the same sort of aggregate amount test that the IRS backed away form with regard to the general de minimis test. IN this case the taxpayer must look at the total of all expenditures that relate to maintenance , improvements and similar expenditures. Taxpayer may not use any other rule(such as the $200 materials and supply limit or routine safe harbor) to exclude items from this total.

 

All such expenditures will be treated as not subject to capitalization rule if they total less than the lesser or 2% of the unadjusted basis of the property or $10,000.

 

Routine Maintenance Safe Harbor

The IRS also addressed criticism that the routine maintenance safe harbor excluded real property. Under the routine maintenance safe harbor, expenditures would not be considered an improvement to property (and thus subject to capitalization under Reg. §1.263(a)-3) if the expenditures are reasonably expected to be incurred by the taxpayer more than once during the class life of the property.

 

The IRS explains in the preamble that due to the long class lives for real property, the agency did not believe the “two times in the class life” test was appropriate for real estate. However, the final regulations introduce a special rule for routine maintenance in real estate, applying the standard rule except substituting 10 years for the class life.

 

Thus, if maintenance is expected to be performed at least twice during 10 years by the taxpayer, the maintenance can be covered by the routine maintenance safe harbor.

The IRS also clarified that merely because the taxpayer ends up not actually performing the maintenance twice during the class life for a particular asset, that does not mean the treatment was in error. But the IRS does caution that the taxpayer’s experience must be considered for future treatments.

 

Effectively, there is no right to “Monday morning quarterbacking” by an IRS examining agent based solely on events that occur after the asset is placed in service, but information available to the taxpayer when the asset is placed in service (including the taxpayer’s prior experience with such assets) is fair game.

 

Financial Statement Conformity

Although retaining the de minimis election conformity requirement, the IRS removed a number of other references to financial statement treatment in the regulations, agreeing that a taxpayer might have different motivations for accounting reporting, and those motivations should not result in different treatments for taxpayers otherwise in the same situation.

 

Remaining Temporary and Proposed Regulations

The IRS did not finalize the regulations for general asset accounts and partial asset dispositions covered by regulations under IRC §168(i). Rather, the IRS issued new proposed regulations but, for now, kept in place the temporary regulations. The IRS apparently prefers to get one more round of comments regarding their proposed changes to these regulations before making them final, though the agency indicated they expect to issue final regulations by the end of the this year.

 

Primarily the IRS has attempted to remove certain mandatory treatments regarding partial dispositions under the 2011 temporary regulations, moving back to the older rules. As well, the IRS no longer proposes to automatically treat each significant structural component of a building as a separate asset, rather defaulting to treating the building as a single asset.

 

The IRS also provided an “audit correction” option. Should the IRS later treat an expenditure as one that must be capitalized for replacing a significant component of the building, the taxpayer may seek permission for an accounting method change to write off the old asset rather than now being required to depreciate both the improvement and the portion of the building asset that represents the original component.

 

Time to Start Advising Clients

Now that the rules are basically in place (aside from those for dispositions mentioned above), clients need to work on getting ready for these regulations. At a minimum, consideration should be given to documenting capitalization policies and insuring that they are consistently followed by the clients.

[kcjenkins]

Just in case anyone is worried about cbslee's post, it is from Nichols Patrick's FREE Hot Topics section.  Thanks for sharing it, cb.  

[JMovichEA]

There are some downloadable flowcharts here that may be useful:

 

http://mcgladrey.com/content/mcgladrey/en_US/what-we-do/services/tax/new-flowcharts-provide-clarity-on-the-final-tangible-property-re.html

[Catherine]

OK;  I have gone absolutely around in circles here.  I've been through CPE on this and I thought it made sense, but this "simple" one has me completely stumped.  

 

I have several small businesses that have NO assets that were not fully depreciated years ago.  Neither do they own any real property.  So there is no question of a 481(a) adjustment needed.

 

All they have is unwritten (now written, but for years not) rules that under $200 or $500 (depending on which business) they expense and do not capitalize.  Printers and small tools and office equipment, generally, of the type that dies in a couple years and is then replaced with the latest cheap version.  Or do they really mean it when the revproc says "does not apply" to businesses where "...(iii) Amounts paid or incurred to which the taxpayer has elected to apply the de minimis safe harbor under § 1.263(a)-1(f);" -- but then what happens to the rule of thumb that *every* business needs this form?  

 

What if all we want is to formally state using the de minimus safe harbor?  What do I put on the 3115 then?  Some options I have seen proposed for line 1a:

 

 

"De minimus rule per Sec. 1.263(a)-(1)(f)"

"All codes 184-193 per new regs"

"arglefraster conforming with new splotnik regs"

 

 

 

and for the final question.... laser print it on paper, or print out a blank and fill it in with a quill dipped in my own blood?

[Lee B]

In the class that I went several weeks ago, the presenter/coauthor said that in a situation like this no 3115 is required or needed.

 

Just elect the safe harbors which apply to your taxpayer's situation.

[Catherine]

From another newsgroup:

 

 This was posted on another list over the weekend.

 

“Good morning everyone,

 

I have some hopeful news. I spoke to someone from the AICPA's Tax Division yesterday and he told me they had a meeting with IRS last Monday about the tangible property regs and the 3115. Nothing certain, but IRS is considering accepting a statement with the return saying that the taxpayer is adopting the new regs instead of having to file a 3115.

And, I think more importantly, they may apply the regs prospectively.

Presumably, IRS will decide withing 2 weeks whether they'll go this route. So, in his words, "Drag your feet".

 

Wouldn't it have been nice if IRS had made this decision 2 months ago?”

 

 

Keep your fingers crossed that the IRS will do the right thing!

[Randall]

And you thought ACA was a  pain.

Rev Proc 2015-13 is 103 pages

Rev Proc 2015-14 is 393 pages

[jshtax]

I couldn't begin to tell you what the changes are that need to be made or how to apply for the changes.

[Randall]

Does anyone have a simple boiler plate 'policy' we can just print and give to the client to file and use as written documented procedures?

[Lion EA]

That's what we're hoping for in a couple weeks, per Catherine's post above.

 

In the meantime, the best inexpensive solution I've found is Lisa Ihm's $20 booklet and free spreadsheet.  My copy was PRIOR to 2015-13 and 2015-14.

 

http://brasstax.com/3115%20Booklet.htm

[jklcpa]

That's what we're hoping for in a couple weeks, per Catherine's post above.

 

In the meantime, the best inexpensive solution I've found is Lisa Ihm's $20 booklet and free spreadsheet.  My copy was PRIOR to 2015-13 and 2015-14.

 

http://brasstax.com/3115%20Booklet.htm

 

This booklet and template has helped me a lot. Thank you again for posting it!

 

Now for the stupid question of the evening. I am still pulling my hair out with this because I have about 30 small assets to write off that will amount to a total deduction (negative change) of a whopping $339! I'm filling out the worksheet for a company with a fiscal year end.  If an asset is put in service, say in March 2004, and the company has a May 31 fiscal year end, technically that asset appeared on the 2003 tax form.  So on my worksheet, should I be entering the 2003 tax year, or should I enter 2004 because that is the actual year of purchase?

[Lion EA]

Gosh, a fiscal year!  That's worse than the one I'm working on with about 30 small assets to write off that will amount to a total deduction of a whopping $200 or so.  And, she keeps texting me to see if I'm done yet, and how much is this going to cost me, and....

[Lynn EA USTCP in Louisiana]

Lion, did Lisa Ihm modify her 3115 booklet after the new rev proc's were issued (2015-13 and 2015-14)? I too,purchased before that.

[tinyfeet]

Lion, did Lisa Ihm modify her 3115 booklet after the new rev proc's were issued (2015-13 and 2015-14)? I too,purchased before that.

Hi, I e-mailed Lisa to see if she modified her booklet after the new rev proc's were issued and her e-mail response was that they felt it did not need to be changed.

Hope this helps.

[Lion EA]

I did the same, emailed Lisa and received that response from one of them at BrassTax.

[mrichman333]

^{It sure would be nice if the IRS had some decent resources, PLEASE!!! For goodness sake, I looked at their archived webinars  and did a search and NOTHING!!!!!!}

 

^{So thank you for the links}

[mrichman333]

PLEASE TELL ME I'M WRONG.   Do I need to recalculate all assets being depreciated in prior years and still has a life left?   And what if everything is the same, for example, the treatment of assets and repairs in prior years  would be the same under the new regs.

[Lion EA]

You will have a $0 adjustment for 481 if all depreciable items are not now supplies/materials/repairs and all old supplies/materials/repairs are not now to be depreciated.

 

I have a client with not much biz income that we've been depreciated items under $200.  So, now we get to take the remaining depreciation as a negative 481 adjustment, a deduction on her Schedule C.  It helps her accept my fee!

 

I also have a client with a lot of biz income that I know I looked for items over $1000 when I checked his QB, so am dreading prepping his 2014 return where I might discover supplies that should be depreciated and have to add to his profits due to a positive 481 adjustment.  I've been talking to him for months, but I know the reality will make him unhappy.

[mrichman333]

You will have a $0 adjustment for 481 if all depreciable items are not now supplies/materials/repairs and all old supplies/materials/repairs are not now to be depreciated.

 

I have a client with not much biz income that we've been depreciated items under $200.  So, now we get to take the remaining depreciation as a negative 481 adjustment, a deduction on her Schedule C.  It helps her accept my fee!

 

I also have a client with a lot of biz income that I know I looked for items over $1000 when I checked his QB, so am dreading prepping his 2014 return where I might discover supplies that should be depreciated and have to add to his profits due to a positive 481 adjustment.  I've been talking to him for months, but I know the reality will make him unhappy.

 

Thank you

[jklcpa]

PLEASE TELL ME I'M WRONG.   Do I need to recalculate all assets being depreciated in prior years and still has a life left?   And what if everything is the same, for example, the treatment of assets and repairs in prior years  would be the same under the new regs.

 

How did you complete the schedules?  Did you show each year or use an abbreviated approach?  Reconciling all this crap is like being a junior accountant again playing with these depreciation schedule tie ins.

 

I FINALLY finished my client's review financial and returns. He is coming at 8pm tonight. I may not get dinner until very late.  I'm so glad for e-filing of the federal. The state gets a copy of the entire federal with all attachments and it is so thick that I had to staple it in 3 separate parts for even my heavy duty stapler for extra thick packages to handle it. Then I put in more staples to hook the 3 parts together.  I have spent WAY TO MUCH TIME on this because of the 3115 issue. This is ridiculous!