Final rules and regulations became effective during 2014 for handling the acquisition, repair, improvement and disposition of real estate and tangible personal property. Many types of expenditures are covered in the final regulations, and they will likely affect all taxpayers that acquire, produce or improve tangible property. A review of current accounting practices and policies, potential adjustments of tax methods used to account for acquisitions and dispositions, and possible tax compliance changes involving tax elections and changes in accounting methods will be necessary due to the new rules. These changes can increase tax savings in 2014.
Here are the major highlights:
Acquisition of Tangible Property
- De Mimimis Rule: A taxpayer may have a written policy in place that elects a de minimis safe harbor for deducting purchases of or tangible property under a specified amount. For most taxpayers this amount will be $500, for taxpayers with Audited Financial Statements the amount could be up to $5,000
- Materials and Supplies: A taxpayer may deduct items with an acquisition or production cost up to $200. The rules provide specific elections for rotable, temporary and emergency spare parts.
- Routine Maintenance: A taxpayer with recurring costs required to keep property in its ordinarily efficient operating condition and not improve the property may qualify for deduction as routine maintenance. An expenditure, regardless of size would be considered routine maintenance if activities and costs are expected to be incurred more than once during the asset class life.
- Major Components and Structural Parts: A taxpayer must identify each unit of property and apply the capitalization rules. While a building is generally considered a relevant unit of property, the rules are applied to each building structure or system that has a discrete and critical function. Unit of property - One key concept in the regulations is the "unit of property"(UOP) that is being improved or repaired. The smaller the UOP, the more likely it is that costs incurred in connection with it will have to be capitalized.
- For example, work on an engine of a vehicle is more likely to be classified as an expense that must be capitalized if the engine is classified as a separate UOP.
- Repairs and Improvements: A cost for repairs or improvements of units of property is generally capitalized when the cost results in betterment, restoration or adaption of units of property to a new or different use. They are deductible if consistent with the intended, ordinary use of property. In 2014 you can use these rules to change the classification of these items from past years.
Disposition of Tangible Property
- Substitution of Costs: An acquisition of property may result in a disposition if it is permanently withdrawn from use, including sale, exchange, retirement, abandonment, transfer or destruction. The acquisition is capitalized and loss is claimed on any undepreciated cost of original property.
- Partial Disposition Rules: A loss deduction may be elected on a partial disposal of a portion of structural components. A simplified method is used to determine adjusted basis for disposition. In the 2014 there is a onetime chance to go back to previous years and take a current year deduction for all partial dispositions that took place in prior years.
The new law contains many potential accounting and tax compliance changes that will need to be addressed during the preparation of the 2014 financial statements and tax returns. The impact may include changes in accounting policies, accounting methods, and additional tax elections in order to comply with the new rules prospectively. Please be prepared to discuss these issues with us in the coming months.
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