The Internal Revenue Service recently finalized the Tangible Property Regulations, “TPR”. These new regulations must be addressed by taxpayers whose tax year begins on or after January 1, 2014. For most tax payers this will begin with your 2014 tax return.
The new regulations determine whether certain expenditures are required to be capitalized or expensed, the tax treatment of materials and supplies, and if the remaining basis in assets partially disposed of can be written off. Taxpayers with depreciable property are generally subject to the regulations in some manner.
The regulations are complex and must be addressed on your 2014 tax return. Some of the issues facing taxpayers are:
• Application of the “TPRs” to all assets with remaining basis,
• Changes to internal procedures to comply with the TPRs,
• Filing one or more IRS Forms 3115, Application for Change in Accounting Method,
• Adjusting 2014 taxable income for the appropriate amount of income or expense if changes are made retroactively, and
• Making annual elections
Practitioners, AICPA and other professional organizations have been requesting additional guidance on these new regulations to simplify the complex nature of these regulations. As recently as February 13, 2015 the IRS issued some guidance. They will allow qualified taxpayers to choose a simplified method of implementing the new regulations. There are significant pitfalls to beware of when utilizing the simplified methods, including losing audit protection.
A qualified taxpayer is defined as each trade or business that has less than $10 million of tax assets or total annual gross receipts that averaged less than $10 million over the past three tax years. This new guidance provides for implementation of the TPRs on a cut-off or prospective basis beginning with the 2014 tax return instead of filing various Forms 3115, Application for Change in Accounting Method, for prior tax years.
Qualified taxpayers have the opportunity to take advantage of this simplified method which allows the TPRs to be applied prospectively, not retroactively. However, by doing so, taxpayers will lose the opportunity to:
• Adopt the benefits (if any) retroactively.
• Obtain IRS audit protection.
• Define a unit of property.
• Deduct removal costs.
• Recapture depreciation.
In addition, the IRS has indicated that it will likely target business taxpayers who do not file Form 3115 with their 2014 returns. Consequently, it is important to comply with regulations this year.
Options available to you are shown below.
1. Apply TPRs retroactively
2. Estimate cost/benefit
3. File a zero Form 3115 and apply TPRs prospectively
4. Apply the TPRs prospectively with filing Form 3115
The TPRs include many elections that may impact your taxes, and we recommend that you schedule a meeting with us to discuss them in detail. Our firm may make the following election on your behalf unless you tell us in writing not to.
• De minimis safe harbor: Allows taxpayers to deduct up to $500 of expenditure ($5,000 if applicable financial statements are prepared), regardless of whether the expenditure meets the definition of a capitalizable expense.
For those of you who have given us the opportunity to work with you and have had us prepare your returns, you may have noticed. We have either filed the zero protective Forms 3115 or have applied the new laws prospectively and with adjustments shown on a Form 3115. Companies with real estate are especially affected by these changes.
If you have not been contacted by your tax professional or are one of our clients that have outside businesses, of which we are not aware, please call us to schedule a time to discuss these Tangible Property Regulations.
We are aware that you have filed or are about to file your 2014 Federal Income Tax returns. However, there may still be an opportunity to amend your return and file a Form 3115 by the extended filing deadline of your return. We cannot emphasize enough the importance of addressing these new depreciation rules.