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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