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Tangible Property Regulations

Amber Yates

March 11, 2015

The IRS and U.S. Treasuring have issued final tangible property regulations (TPRs) that govern when taxpayers must capitalize and when they can deduct expenditures for acquiring, producing or improving tangible property. These regulations are fully effective for the 2014 tax year. The regulations introduce complex, new definitions and requirements that, in some instances conflict with prior tax accounting methods.

While complicated, in many instances, the new rules are “taxpayer friendly”. They provide guidance for accelerating deductions under new criteria for expenses such as materials and supplies, repairs and maintenance, or improvements to tangible property.

The final regulations created several new annual elections. Some safe harbors and elections are implemented by filing statements or reporting an item on a timely filed federal tax return. Other provisions of the TPRs, however, are considered to be a change in method of accounting, which may require a taxpayer to file Form 3115, Application for Change in Accounting Method. In fact, some taxpayers might be required to file more than one Form 3115, depending on their situation.

The latest guidance received from the IRS, outlines new simplified procedures that will allow a small business (defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three taxable years) 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 January 1, 2014. If a taxpayer has more than one business, the limitations apply separately to each business. The IRS is also waiving the requirement to complete and file IRS Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

If the simplified procedures are elected, the taxpayer does lose opportunities that might exist to write off assets that were capitalized in prior years that could have been expensed, or to report a late partial disposition. A taxpayer electing to use these simplified procedures will also lose the potential audit protection related to capitalization decisions made in prior years. Additionally, if you make this election, no further accounting method changes can be made by you with regard to these regulations for 5 years. While current changes in method (on your 2014 return) regarding these regulations are automatic and the IRS will assess no change fees; any future changes will require advanced consent and a substantial fee to be paid to the IRS.

We will be reviewing each of our client’s files for applicability of these new regulations. If you have any questions regarding these changes, please be sure to call us.

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