Tangible Property/Repair Regs Resources

[jklcpa]

So then if we have looked back and can seen that things had been done properly all along, therefore no change, it is saying that we do not have to file the 3115 but simply file the tax return and in thus doing so agree to the changes?

 

Well, maybe. I think we still need to consider the facts and circumstances for 2014 and possibly ask what's happened in the business so far in this year, or if that client has major repair costs that are anticipated even for this 2015 year, before jumping to the automatic assumption that applying this prospectively is always the best course. For example, if the client has a substantial repair in 2014 (or anticipates making one) that should be capitalized under the new rules because it is a betterment (roof is always a good example) and the depreciation schedule previously only showed "building", the preparer might want to consider going back to break down that building into the components so that when the new roof is capitalized, the client gets the advantage of writing off the old roof component in that same year.

 

At least at this moment I think that is what I think. 

[Tax Prep by Deb]

Well, maybe. I think we still need to consider the facts and circumstances for 2014 and possibly ask what's happened in the business so far in this year, or if that client has major repair costs that are anticipated even for this 2015 year, before jumping to the automatic assumption that applying this prospectively is always the best course. For example, if the client has a substantial repair in 2014 (or anticipates making one) that should be capitalized under the new rules because it is a betterment (roof is always a good example) and the depreciation schedule previously only showed "building", the preparer might want to consider going back to break down that building into the components so that when the new roof is capitalized, the client gets the advantage of writing off the old roof component in that same year.

 

At least at this moment I think that is what I think. 

I get that, but like in the case of a rental, how in the world are we suppose to know the cost associated with breaking a unit up.  The purchase is for the whole thing.  How do we segregate the individual components out?

[kcjenkins]

Well, I had one client hire a firm [NCSS] to do a Segregation Study on a new building purchase.  Was worth the cost, but it did cost about $3400. I don't how you could do that retroactively.  Although if you think the number might be significant, I'd start by talking to a professional appraiser.  

[Lion EA]

And, if applying the regs prospectively, then no audit protection for years prior to 1 January 2014.

 

I have some higher income businesses that weren't depreciating anything under $1,000; so I still might want to urge 3115s for them to bring them into compliance.

 

For my lower income businesses, this simplification is a great relief.

[Catherine]

My concern is some elderly clients who have two-family houses and rent out one side.  Whole-house repairs - like the boiler that broke a few years ago mid-winter and had to be replaced immediately - got expensed (restoration of function).  But under the new regs, the portion that was improvements (more efficient than the ancient behemoth) should have been capitalized, and the old boiler use written off. How am I going to figure what percentage of a new boiler is "improvements" due to efficiency?  How am I going to figure the "loss" on the ancient thing that died?  How do I protect folks in their 70's - or older - from IRS scrutiny?  The lack of look-back protection is nasty -- but I don't see any way even to do the analysis needed without substantially making numbers up!  10% of the new boiler is improvements for efficiency.  Well, maybe 25%.  How 'bout 17.267%?  What if the new boiler, while more efficient, was also the *least* efficient (=cheapest to buy) model out there at the time?  Does that still count as efficiency improvement?  Then what about the leaking roof on another place, that had three layers of shingles so by law HAD to be stripped down and replaced?  And the list goes on.

 

My elderly landlords are all going on extension.  I'm not giving them a choice. 

[mrichman333]

My concern is some elderly clients who have two-family houses and rent out one side.  Whole-house repairs - like the boiler that broke a few years ago mid-winter and had to be replaced immediately - got expensed (restoration of function).  But under the new regs, the portion that was improvements (more efficient than the ancient behemoth) should have been capitalized, and the old boiler use written off. How am I going to figure what percentage of a new boiler is "improvements" due to efficiency?  How am I going to figure the "loss" on the ancient thing that died?  How do I protect folks in their 70's - or older - from IRS scrutiny?  The lack of look-back protection is nasty -- but I don't see any way even to do the analysis needed without substantially making numbers up!  10% of the new boiler is improvements for efficiency.  Well, maybe 25%.  How 'bout 17.267%?  What if the new boiler, while more efficient, was also the *least* efficient (=cheapest to buy) model out there at the time?  Does that still count as efficiency improvement?  Then what about the leaking roof on another place, that had three layers of shingles so by law HAD to be stripped down and replaced?  And the list goes on.

 

My elderly landlords are all going on extension.  I'm not giving them a choice. 

 

I think regs are often created with multi million dollar companies in mind or real estate developer like Trump and no provision is made for the small guy.   How much of a difference in tax is there going to be if the entire boiler is expensed rather then split up; probably not much.  But if we were talking about a company that owns numerous apartment buildings with hundreds or thousands of tenants this type of detail can result in huge tax differences.

 

my point if it comes down to 50 to 100 buck difference I'm not spending hours on it

[Lion EA]

I haven't had any rentals for a year or two.  However, a client for a few years went to HRB last year but is back to me this year with an out-of-state rental.  I already told her she's going on extension and why.

 

I took a free two-hour webinar Friday that's probably in their archives:  CPAacademy.org -- 2014 Updates to the Tangible Property Repair Regulations.  The IRS announcement came during the webinar, so was mentioned but not covered.  The two speakers were from KBKG who does cost segregation studies, among other things, so I was expecting it to be for bigger clients than mine.  However, they did talk about what they suggest for their small clients as opposed to their large.  Very practical advice,

 

Catherine (and Everyone):  A couple of things that came up --

 

1. For those amounts not appropriate for a cost segregation study, the IRS allows "any reasonable method," such as using the Producer Price Index discounted to the placed-in-service year or the free KBKG PPI Asset Search Tool on their website:  www.kbkg.com/ppi-search-tool

 

2. Enhancement due to technological advancements is not necessarily betterment.  Example:  HVAC equipment is always going to be more efficient.  So, the question is really just "is it comparable with the old"?

[kcjenkins]

Thanks, Lion, those are good points and so is the link.   

[mrichman333]

There was a really great article in Forbes today and it was put in a q/a conversation between the author a tax preparer that was funny also.

 

http://www.forbes.com/sites/anthonynitti/2015/02/14/repair-regulation-relief-what-does-it-really-mean-not-as-much-as-you-think/

[Lee B]

There was a really great article in Forbes today and it was put in a q/a conversation between the author a tax preparer that was funny also.

 

http://www.forbes.com/sites/anthonynitti/2015/02/14/repair-regulation-relief-what-does-it-really-mean-not-as-much-as-you-think/

 

Very good article. I am going to print it out and use as a guideline.

 

Thanks for posting this

[David]

Client owns a restaurant business and also has a separate LLC that owns the building that the restaurant is leasing. The restaurant is responsible for all maintenance, repairs, improvements, etc. 

 

He paved the parking lot for $44K and received a grant from the city for $22K. Since the paving is keeping the property in it's original condition and isn't a betterment, does he get to expense the $22K cost?

 

Or is does he have to meet the expected 2 times in a 10 year period test?

 

Also, now that we don't need to file a 3115 for our small business taxpayers, don't we still need to make the annual election for the deminimis safe harbor and the repair safe harbor? 

 

Thanks.

[Lynn EA USTCP in Louisiana]

David, the de minimus elections are required to be filed each time that the taxpayer chooses to make them, and must be filed even if the form 3115 is included in the return.  With or without 3115, de minimus elections are required.

[Lee B]

More revised Repair Regs Guidance from Grant Thornton LLP via an email from NAEA:

 

New federal tax developments
from Grant Thornton’s Washington National Tax Office
2015-03

Feb. 16, 2015

 

IRS simplifies process for small businesses to implement tangible property regulations

 

The IRS released a simplified procedure allowing certain small businesses to change
a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014, without completing and filing Form 3115,
“Application for Change in Method of Accounting.”  Rev. Proc. 2015-20 was released by the IRS

on Feb. 13 and is effective immediately.  A taxpayer is eligible to apply the simplified implementation procedures if it has one or more trades or businesses that have either:
(a) Total assets of less than $10 million as of the first day of the taxable year for which a change in
method of accounting under the final tangible property regulations and corresponding procedures
regarding related changes in method of accounting is effective 

(b ) Average annual gross receipts of $10 million or less for the prior three taxable years, as determined under Treas. Reg. Sec. 1.263(a)-3(h)(3) (the small taxpayer election for certain repairs and
improvement expenditures for eligible buildings)
The revenue procedure applies to a trade or business only if it meets one or both of the previous two criteria.

 

Background

 

The final tangible property regulations include both TD 9636, regarding when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted, and TD
9689, regarding certain depreciation rules and full and partial dispositions of tangible depreciable property. (For more on the final tangible property regulations, see Tax Flash 2013-13 and Tax Flash 2014-10).
The final tangible property regulations generally apply to taxable years beginning on or after Jan. 1, 2014, although certain provisions are applicable to costs incurred on or after taxable years beginning on or after Jan. 1, 2014.  The previous procedures for implementing the final regulations were included in a series of revenue procedures (Rev. Proc. 2014-16, Rev. Proc. 2014-17 and Rev. Proc. 2014-54), which were recently modified by and consolidated into Rev. Proc. 2015-14. These procedures generally require that changes in methods of accounting to comply with the final tangible property regulations should be implemented using Section 481(a) to avoid duplication or omission (except for

provisions applicable to costs incurred on or after taxable years beginning on or after Jan. 1, 2014).

Section 481(a) requires a look-back adjustment computed as if the business had always used the new method of accounting. Additionally, the procedures require businesses that are changing a method of accounting to implement the final tangible property regulations to complete and file Form 3115.

 

Simplified procedures

 

Rev. Proc. 2015-20 effectively allows small businesses that make changes in methods of accounting for the first taxable year that begins on or after Jan. 1, 2014, to elect to make the changes prospectively by using a cut-off basis.  Thus, small businesses that must change methods of accounting to comply with the new regulations can make a Section 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after Jan.

1, 2014 (i.e., there is only a Section 481(a) adjustment computed back to 2014 when a change is made in a future year). The election must be applied to all of the final tangible property regulations, including
dispositions. Accordingly, businesses are not allowed to apply certain rules, such as the treatment of repair expenditures, prospectively, and make disposition method changes with a Section 481(a)
adjustment. Additionally, businesses making this election do not have audit protection.

 

Businesses making the election to apply the final regulations prospectively have the option of making certain changes in method of accounting to comply with the regulations on the federal tax return
without filing a Form 3115 or a separate statement for the business’s first taxable year ending on or after Jan. 1, 2014.
Special transition rules apply for eligible businesses that already filed the federal tax return for the first taxable year beginning on or after Jan. 1, 2014.

 

Implications and next steps

 

This is truly welcome relief for small businesses that do not wish to take advantage of the cash tax savings opportunities in the regulations because of the increased burden and cost of implementation. Allowing small businesses to elect to apply the regulations prospectively and waive the requirement to
file a Form 3115 greatly reduces their burden in implementing the regulations.  Businesses taking advantage of the simplified procedures must still apply the new rules to their assets on their 2014 tax
returns. This may require changes in the manner in which expenditures for certain assets are recovered, such as current expense, deferred materials and supplies expense, and depreciable assets.
Additionally, taxpayers will need to determine whether to make certain elections, such as the de minimis rule, the small business election for repairs on eligible buildings or the election to follow
book capitalization of repairs — all of which require an annual statement to be attached to the tax return.

 

Similarly, taxpayers that do not track dispositions of certain assets (for example, personal property grouped as one asset in the fixed asset system) should continue to determine whether to make a general asset account election, which requires checking a box on Form 4562, “Depreciation and
Amortization.”

 

Taxpayers considering the less burdensome implementation rules should be aware that the simplification comes at the cost of the missed opportunity to accelerate deductions on certain costs capitalized in prior years. Taxpayers will not be able to file changes in future years to accelerate
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[Lion EA]

A FREE 30-minute on-demand webinar from NATP titled Form 3115 Filing Relief Explained:

 

http://www.natptax.com/TaxKnowledgeCenter/FederalTaxInformation/Pages/Form3115FilingReliefExpained.aspx

[mrichman333]

A FREE 30-minute on-demand webinar from NATP titled Form 3115 Filing Relief Explained:

 

http://www.natptax.com/TaxKnowledgeCenter/FederalTaxInformation/Pages/Form3115FilingReliefExpained.aspx

 

Thanks for the link

[David]

Thanks, Lynn.

 

Regarding the parking lot paving costs - since it isn't a betterment can the $22K be expensed?

 

Or does it have to meet the required 2 times in a 10 year period test before it can be expensed?

 

Thanks.

[Lee B]

A FREE 30-minute on-demand webinar from NATP titled Form 3115 Filing Relief Explained:

 

http://www.natptax.com/TaxKnowledgeCenter/FederalTaxInformation/Pages/Form3115FilingReliefExpained.aspx

 

Clarification, if you are not a member there is a $ 20 Fee.

[Lion EA]

Good point.  As a member, I didn't notice that.  Considering how much I pay for education, that half hour is probably worth $20 in the scheme of things.  If you're a member, definitely go for it.  The bullet point slides (which you can download to your computer &/or print) were a nice outline.

[Cathy]

Good article on the new regs by the Journal of Accountancy:

 

http://journalofaccountancy.com/issues/2014/may/20149424.html

[JMovichEA]

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations

[Margaret CPA in OH]

At last, a good link to share with clients who have this blank look on their faces when I try to explain, especially that I am not making this up!

 

Thanks!

[Cathy]

Revised Publication 546 (How to Depreciate Property) is hot off the press!

 

I was, originally, relieved to see that IRS revised the publication until I got to a section on page 14 of the publication.  Evidently, the new rules and regs are clear as mud to them as well.

 

 

"Additional guidance. For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2015-13 on page 419 of the Internal Revenue Bulletin 2015-5 and Revenue Procedure 2015-14 on page 450 of the Internal Revenue Bulletin 2015-5, available at www.irs.gov/irb/ 2015­5_IRB/index.html. (Note. Revenue Procedure 2011-14 is modified by Revenue Procedure 2014-17 and Revenue Procedure 2014-54. For more information, see Revenue Procedure 2014-17 on page 661 of Internal Revenue Bulletin 2014-12, available at www.irs.gov/irb/ 2014­12_IRB/ar09.html and Revenue Procedure 2014-54 on page 675 of Internal Revenue Bulletin 2014-41, available at http://www.irs.gov/irb/2014­41_IRB/ar14.html.)For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www.irs.gov/irb/2007­29_IRB/ ar13.html."

[Lee B]

3.  Tangible Property Final Regulations FAQs now Available

The Tangible Property Frequently Asked Questions provide a brief summation and direction on some key elements of the Tangible Property Regulations and include information on simplified procedures for small business taxpayers

[Terry D EA]

I am sure many of you are aware of the changes surrounding the tangible property safe harbor rules and limits beginning 2016. However, I posted this link just in case anyone missed it or would like a reference to the changes for tax payers with or without an AFS.

https://www.irs.gov/pub/irs-drop/n-15-82.pdf