Tangible Property Regulations

Report
Tangible Property
Regulations (TPR) Issues
that CFO Need to Know
Presented by
Eric P. Wallace, CPA
[email protected]
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
The ‘Company’ Issues
1. Identifying the company issues that will arise
from the final tangible property regulations
(TPR) implementation
2. Review depreciation schedules for items that
need corrections
 This review will guide you to issues to address for
the TPRs
2
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
The ‘Company’ Issues
3. The filing of beneficial 3115s (those with
negative 481(a) adjustments) for prior or
partial building components disposed of (these
are write offs) and the depreciation
corrections (how to gather the facts)
4. Consider what 3115s will have to be filed in
current and future years (no later than tax
year 2014)
3
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
The ‘CPA In-House’ Issues
5. The internal processes your company will have
to implement by 2014 (establish de minimis
write-off amounts (now with or without if
AFS), M & S, Capitalization policy for R & M,
others)
4
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
Get a DMSH Policy in Place by 12-31-13
Non-AFS DMSH
AFS DMSH

To take advantage of either of these, a Taxpayer (TP) must have an
accounting policy in place before January 1, 2014, if calendar year TP
5
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
Get a DMSH Policy in Place
Want to take advantage of the
DMSH for any TP?
 Can increase max write off per
item/invoice to $500/$5,000 (nonAFS DMSH and AFS DMSH)
6
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
First Discussion Topic
Get a DMSH Policy in Place
An accounting policy in place response is
required for all separate trades or businesses
and any separate legal entities, such as singlemember LLC
If no accounting policy in place or TP does not
make the annual election, TP will be limited
to $200 per item/invoice, but only for units of
property… parts will have to be deferred, no
matter what the $$amounts
7
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
DMSH Policy in Place Elements
Non-AFS DMSH
What are the
required elements
in an accounting
policy for a
non-AFS TP?
8
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
DMSH Policy in Place Elements
Non-AFS DMSH
Have an accounting policy in place
Specify a write-off dollar amount
Be in place before the beginning of the TP year
Actually write the items off for books
Apply the DMSH to all items that qualify
9
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
DMSH Policy in Place Elements
AFS DMSH
What are the
additional required
elements in an
accounting policy for
an AFS DMSH TP?
10
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
DMSH Policy in Place Elements
The accounting policy MUST
also, before the tax year:
AFS DMSH
Be documented
Be communicated
Have an applicable financial statement
Note:
With an AFS a TP will be writing the
amounts off for financial statement
11
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Depreciation Allowable or
Taken—This Issue Is ‘HUGE’
Points
1. Use 2013 (i.e. tax depreciation schedules as of 1231-2012) to correct any errors in prior year
depreciation, and
2. Section 1.1016-3 remains part of the TPRs for a
reason—that is the “scary” part—the IRS will use
this in their audits of TPs to deny depreciation
deductions
12
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
A Warning About
Depreciation—from the TPR
Issue
 What is the amount of depreciation that a TP can
take in a given tax year?
 A: What is allowed or allowable
Ask yourself—Why was this new section
included in the tangible property regs
(Temporary (T) and Final (F))?
To emphasize the fact that in depreciation
deductions—you use it or lose it
13
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
What the ‘Repair’
Regulations Do
Temporary and Final tangible property
regulations (TPR) provide guidance
(“Framework”) on the application of sections
162(a) (deduction) and 263(a) (requires
capitalization) of the Code to amounts paid to
acquire, produce, or improve tangible property
 Regulations aim to clarify the difference between
these two opposites
14
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
The F and P TPR 6 Potential
New Annual Elections
The final and proposed TPRs have six new
annual elections including
1, 2, 3: Three enable a TP to capitalize and
depreciate certain items that could be written off for
tax, but taxpayer wants to elect to capitalize instead
Two others deal with real estate issues, the
Last one, the de minimis safe harbor (DMSH) is a big
item for contractors …….
15
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
The F and P TPR
New Annual Elections
The De minimis safe harbor election (§1.162-3(f)(1))
does not require any method change. Here are its
general tenents:

A TP with and without an AFS may not capitalize any
amount paid in the taxable year for the acquisition or
production of a unit of tangible property nor treat as a
material or supply under §1.162-3(a) any amount paid in
the taxable year for tangible property if the amount
specified meets the rules
–
$500 and $5,000 per invoice respectively
16
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
De minimis applies to all of these
Application of the de minimis
to TPR Issues
§1.162-3 Rules for materials and supplies
§1.162-4 Repairs and maintenance
§1.263(a)-1 General rules for capital expenditures
§1.263(a)-2 Rules for amounts paid for the
acquisition or production of tangible property
§1.263(a)-3 Rules for amounts paid for the
improvement of tangible property
17
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Definition of
Material and Supplies
We now have the following groups of types of M & S, when
the final TPRs are effective
1
2
• Non-incidental (includes rotable, temporary,
or standby emergency spare parts)
• Fuel or Bulk
3
• Units of Property with life of less
than one year
4
• Units of Property with cost of $200
or less
18
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Visual Depiction of the Interaction of
De Minimis to M & S and UoP Items
First—Before we advance into the details of these main
TPR issues, let’s summarize the interaction of the de
minimis safe harbors and
a) material and supplies (M&S);
b) repairs and maintenance (R & M);
c) UoP (Unit of Property) with lives less than one year, and
d) UoP with lives greater than one year
Note that I did not use the term “class lives,” but
rather used the term ‘lives”
 There is a difference
19
Final Tangible Property Regulations
A CCH Seminar
Visual Application of the Final TPR
Regulation and DMSHs
No DMSH
Cost Per Item
M & S - No Units of Property
UoP
< one year < one year
> one year life
life
life
I
NI
< $200
WO
Defer
Defer
WO
WO
> $200 but <
$500
NA
Defer
Defer
CAP
CAP
> $500 but <
$5,000
NA
Defer
Defer
CAP
CAP
> $5,000
NA
Defer
Defer
CAP
CAP
Codes:
I= Incidental, NI= Non-incidental
UoP= Unit of Property (Acquisition)
DMSH= de minimis safe harbor
20
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Visual Application of the Final TPR
Regulation and DMSHs
No DMSH
Cost Per Item
M & S – Units of Property
UoP
< one year < one year
> one year life
life
life
I
NI
< $200
WO
WO
WO
WO
WO
> $200 but <
$500
NA
Defer
Defer
CAP
CAP
> $500 but <
$5,000
NA
Defer
Defer
CAP
CAP
> $5,000
NA
Defer
Defer
CAP
CAP
Codes:
I= Incidental, NI= Non-incidental
UoP= Unit of Property (Acquisition)
DMSH= de minimis safe harbor
21
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Visual Application of the Final TPR
Regulation and DMSHs
Non- AFS DMSH
Cost Per Item
M&S
UoP
< one year
> one year life
life
I
NI
< one year
life
< $200
WO
WO
WO
WO
WO
> $200 but <
$500
NA
WO
WO
WO
WO
> $500 but <
$5,000
NA
Defer
Defer
WO
CAP
> $5,000
NA
Defer
Defer
WO
CAP
Codes:
I= Incidental, NI= Non-incidental
UoP= Unit of Property (Acquisition)
DMSH= de minimis safe harbor
22
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Visual Application of the Final TPR
Regulation and DMSHs
AFS DMSH
Cost Per Item
M&S
UoP
< one year > one year
life
life
I
NI
< one year
life
< $200
WO
WO
WO
WO
WO
> $200 but <
$500
NA
WO
WO
WO
WO
> $500 but <
$5,000
NA
WO
WO
WO
WO
> $5,000
NA
Defer
Defer
WO
CAP
Codes:
I= Incidental, NI= Non-incidental
UoP= Unit of Property (Acquisition)
DMSH= de minimis safe harbor
23
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
FS required to be
filed with the SEC
Certified audited FS
•Used for credit purposes
•Reporting
•Other substantial non-tax purpose
Defined as financial
statements that
have the highest
priority
FS required to be provided to the
federal or a state government or
agencies
•Other than the SEC or IRS
24
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Repairs—Reg. §1.162-4
Is a simple, straightforward rule, that is the opposite
of capitalization
 Amounts paid for repairs and maintenance to tangible
property are deductible if the amounts paid are not required
to be capitalized under Reg. §1.263(a)-3
Same rule as from temporary TPRs
A change to comply with this is a change in method of
accounting to which the provisions of Sections 446 and
481 and the accompanying regulations apply
No examples in Final TPRs
25
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Amounts Paid to Improve Tangible
Property—Reg. §1.263(a)-3(d)
Requirement to capitalize amounts paid for
improvements
A TP generally must capitalize the related amounts
paid to improve a UoP owned by the TP
A UoP is improved if the amounts paid for activities
performed after the property is placed in service by
the TP—
1.
Are for a betterment to the UoP
2.
Restore the UoP or
3.
Adapt the UoP to a new or different use
26
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Special Rules for Determining
Improvement Costs—Reg. §1.263(a)-3(g)
Certain costs incurred during an improvement
A TP must capitalize all the direct costs of an
improvement and all the indirect costs (including, for
example, otherwise deductible repair costs) that
directly benefit or are incurred by reason of an
improvement
Indirect costs arising from activities that do not
directly benefit and are not incurred by reason of an
improvement are not required to be capitalized under
Section 263(a), regardless of whether the activities are
performed at the same time as an improvement
27
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Special Rules for Determining
Improvement Costs—Reg. §1.263(a)-3(g)
Removal Costs—
If a TP disposes of a depreciable asset, including a partial
disposition under Prop. Reg. §1.168(i)-1(e)(2)(ix), and has
taken into account the adjusted basis of the asset or
component of the asset in realizing gain or loss, then the
costs of removing the asset or component are not required
to be capitalized
If a TP disposes of a component of a UoP, but the disposal of
the component is not a disposition, then the TP must deduct
or capitalize the costs of removing the component based on
whether the removal costs directly benefit or are incurred
by reason of a repair to the UoP or an improvement to the
UoP
28
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Betterments
Reg. §1.263(a)-3(j)
An amount is a betterment to a UoP only if it:
 Ameliorates a material condition or defect that
either existed prior
 Is for a material addition, including a physical
enlargement, expansion, extension, or addition of a
major component to the unit of property or a
material increase in the capacity
 Is reasonably expected to materially increase the
productivity, efficiency, strength, quality, or output
29
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Betterments
—Reg. §1.263(a)-3(j) (slide 2)
Application of betterment rules
 The applicability of each quantitative and qualitative factors
to a particular UoP depends on the nature of the UoP
 For example, if an addition or an increase in a particular
factor cannot be measured in the context of a specific type of
property, this factor is not relevant in the determination of
whether an amount has been paid for a betterment to the UoP
 An amount is paid to improve a building if it is paid for an
increase in the efficiency of the building structure or any one
of its building systems (for example, the HVAC system)
30
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Betterments
—Reg. §1.263(a)-3(j) (slide 3)
Appropriate comparison
 In cases in which an expenditure is necessitated by
normal wear and tear or damage to the UoP that
occurred during the TP’s use of the UoP, the
determination of whether an expenditure is for the
betterment of the UoP is made by comparing the
condition of the property immediately after the
expenditure with the condition of the property
immediately prior to the circumstances
necessitating the expenditure
31
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Restorations
Reg. §1.263(a)-3(k)
A TP must capitalize as an improvement an
amount paid to restore a UoP, including an
amount paid to make good the exhaustion for
which an allowance is or has been made
An amount restores a UoP only if it
 Is a replacement where TP deducted a loss, taken
into account the basis in a sale, casualty loss
32
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Restorations
Reg. §1.263(a)-3(k)
 Returns the UoP to its ordinarily efficient operating
condition if the property has deteriorated to a state
of disrepair and is no longer functional for its
intended use;
 Rebuilds the UoP to a like-new condition after the
end of its class life
 Is for the replacement of a part or a combination of
parts that comprise a major component or a
substantial structural part of a UoP
33
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Capitalization of Amounts to Adapt Property to
a New or Different Use—Reg. §1.263(a)-3(l)
A TP must capitalize as an improvement an amount
paid to adapt a UoP to a new or different use
An amount is paid to adapt a UoP to a new or
different use if the adaptation is not consistent
with the TP’s ordinary use of the UoP at the time
originally placed in service by the TP
Just like in the sections on betterments,
restorations, there are no accounting method
changes required to adopt
34
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Accounting Method Changes
for §1.263(a)-3
A change to comply with this section is a
change in method of accounting to which 446
and 481 and the accompanying regulations
apply
A TP seeking to change to a method of
accounting in 1.263(a)-3 must secure the
consent of the IRS
35
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
Accounting Method Changes
for §1.263(a)-3
Applies to taxable years on or after 1-1-14,
except for (h) the safe harbor for small
taxpayers, (m) the optional regulatory method,
and (n) the election to capitalize R & M apply
to amounts paid on or after 1-1-14
Except for (h), (m), and (n), a TP may choose
to apply this section to taxable years beginning
on or after 1-1-2012. A TP may choose to apply
(h), (m), and (n) to amounts paid in taxable
years beginning on or after 1-1-2012
36
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
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Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs
CONCLUSION
Final Tangible Property Regulations
An Eric P. Wallace CPA Seminar Boyer & Ritter CPAs

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