A Quick Primer on the New Tangible Assets Regulations

A Quick PrimerA few weeks ago we reported on how the new tangible assets rules will impact your 2014 taxes (New Rules for Tangible Assets Affect 2014 Tax Return). As a follow up to that we are bringing you a Q&A provided by Jeffrey Collins on the The Journal Record website that will make these new regulations easy to understand. 

Q: The IRS has issued new regulations that change how taxpayers treat fixed assets and repair costs. Who should be concerned about these changes?
A: When the IRS issued the draft of these regulations, the preamble indicated virtually all taxpayers with fixed assets will be impacted by the regulations.

Q. What is a fixed asset? Who would have them?
A: Essentially, a fixed asset is real or personal property used to help generate a profit, and is expected to last more than a year. Consequently, a wide variety of taxpayers are affected. 

Q. What kind of changes did the IRS make?
A. Primarily, the IRS was concerned with drawing clearer rules regarding which types of costs could be expensed (taken as an immediate deduction on the tax return) and which items have to be capitalized. When a taxpayer capitalizes costs, they are usually required to spread those costs and take deductions over several years. However, the regulations also made changes to when taxpayers could deduct purchases for expenses like supplies.

Q. What was the reason for these new regulations?
A.The IRS has spent years fighting with taxpayers in the courts over these issues. There were no clear guidelines in many areas so the courts were having to essentially make the rules up as they went along. The result was neither the IRS nor taxpayers were entirely clear on what the rules were.

Q. Are the new rules bad news for taxpayers?
A. Not at all. While taxpayers aren’t likely to like all the rules, there are some IRS concessions that could be very beneficial. 

Q: What do taxpayers need to do to comply with the new regulations?
A: In some cases, like the safe harbor rules, a taxpayer can take advantage of the rule by putting it into practice. In other cases, an election will need to be filed with a return. However, in order to be in full compliance with the regulations, many taxpayers will need to file a Form 3115 to adopt new accounting methods. Many experts believe that almost all taxpayers with fixed assets or repairs will be required to file at least one accounting method change to be in compliance with the new rules. 

Q. Where can taxpayers go for more information?
A. It’s definitely going to be important to talk to a tax professional who is familiar with the rules before making any decisions.

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

New Rules for Tangible Assets Affect 2014 Tax Return

New Rules for Tangible Property wIn case you are unaware, in 2014 the federal government made many changes to tax rules that govern tangible assets, such as equipment used in manufacturing. Business owners and executives need to be cognizant of the fact that these rules will likely require them to change their tax accounting methods before filing 2014 income tax returns. We point you to this article found on the Hein Advisers website.

Many businesses will find that the prior year changes result in additional deductions that can be claimed as a one-time expense on 2014 tax returns. On the other hand, businesses that fail to file the required tax accounting method changes could face some very serious consequences.

Benefits of the New Rules

The recent guidance from the IRS changes how some payments made to repair and maintain machinery, equipment, and other assets are classified. In many instances, those changes may result in larger amounts written off as expenses in the year they are paid instead of amounts added to the cost of the asset and expensed over multiple years as depreciation. Here are a few examples:

  • Partial Asset Disposition—Under previous rules, payments for substantial repairs were added to the basis of an asset without any adjustment for the value of what was replaced. The new rules provide a formula for expensing the portion of the equipment’s basis attributable to pieces being restored. The cost of the restoration is then added to the remaining original basis to determine the new depreciable basis of the asset.
  • Units of Property—The total depreciable basis of assets like manufacturing equipment will now be apportioned among some of the substantial components that perform discrete major functions. The rules refer to these new individual components as “units of property.” Each unit of property is now deemed to be a separate and distinct asset and not part of the asset that it helps to make up.
  • Routine Maintenance Safe Harbor—The rules clarify treatment for routine maintenance to allow for expensing of payments for repairs that businesses reasonably expect to make at least once during the life of the asset.
  • De Minimis Safe Harbor—A business that issues audited financial statements can elect to expense up to $5,000 per repair or acquisition in the current year, whereas the prior rules might have required those payments to be added to the basis of the asset and depreciated over time.

Consequences of Not Filing a Proper Accounting Method Change

If a business fails to make one of the required changes before filing its 2014 tax return, numerous problems can arise.

  • Increased Audit Risk
  • Lost Deductions
  • Re-Characterization of Prior Deductions

The most important thing for business owners and executives to remember is that these accounting method changes must be made prior to filing the 2014 tax return. Every business should consult with a tax advisor (sic) who is familiar with the new rules to make sure that it makes the proper accounting method changes and elections for its circumstances.

Read Full Article Here:

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

Tangible Property Regulations – Updated

Tangible Property Updated fwWe closely reported on the IRS Tangible Property Regulations that were issued in 2013. As of August 18, 2014 the IRS released an update and final regulations (T.D. 9689).

While not significantly different from the rules released last year, now that they are in effect, it is apropos to review the main points again. In a post on Journal of Accountancy, editor-in-chief, tax, Alistair M. Nevius gives us the run down.

Dispositions of MACRS property

Under the regulations, a disposition includes the “sale, exchange, retirement, physical abandonment, or destruction of an asset” and occurs when the taxpayer either transfers ownership of the asset or permanently withdraws the asset from use in the taxpayer’s trade or business or in the production of income.

Partial dispositions

The disposition rules also apply to partial dispositions of an asset. This allows taxpayers to claim a loss on the disposition of a component without identifying the component as an asset before the disposition. The partial disposition rule also reduces the circumstances requiring simultaneous depreciation of an original part and its replacement part.

Determining gain or loss

Under these rules, if an asset’s disposition is the result of a sale, exchange, or involuntary conversion, gain or loss is recognized under the applicable Code section. If an asset is abandoned, loss is recognized in the amount of the asset’s adjusted depreciable basis at the time of abandonment (unless the abandoned asset is subject to nonrecourse indebtedness; then the abandonment is treated as a sale).

Determining basis

If disposed of assets are in a multiple asset account and it is impracticable for the taxpayer to determine the unadjusted depreciable basis of the disposed of asset, the regulations allow the taxpayer to use any reasonable method that is consistently applied to all assets in the same multiple asset account to determine the asset’s basis.

General asset accounts

Taxpayers are allowed to maintain general asset accounts for any MACRS property (Sec. 168(i)(4)), and when property in a general asset account is disposed of, the taxpayer includes the proceeds in ordinary income.

Read Full Article Here:

Read Our Other Posts on Tangible Property Regulations:

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

 

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Tangible Property Regulations – A Deeper Look

Tangible Propert DeeperAs followers of this blog know, the IRS changed the Tangible Property Regulations as of September 2013. Following that announcement we put together a 4 part series highlighting what we felt were the most essential areas. You can read our series here:

For those of you looking for deeper analysis, McGladrey, a leading provider of assurance, tax and consulting services focused on the middle market, recently covered the same material with a significantly in-depth 4 part series on the final tangible property regulations. If you would like more information on this topic follow the links below.

In September 2013, the Treasury Department and the IRS, released the much-anticipated final (and proposed) tangible property regulations. The majority of the regulations were issued in final form. However, as expected, regulations surrounding dispositions of tangible property were issued in proposed form, but also as reliance guidance.

·         Part I – Favorable changes to materials and supplies and de minimis safe harbors

·         Part II – Clarifications and taxpayer-friendly safe harbors and elections added for acquisition and improvement rules

·         Part III – General improvement rules

·         Part IV -Proposed regulations governing dispositions and general asset accounts

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

IRS Issues New Tangible Property Regulations – Part 4

IRS Issues New Regs 4As indicated in our previous post on this same topic, major new IRS regulations that govern the treatment of expenditures to acquire, maintain, repair and replace tangible assets have been issued and will be effective for tax years beginning on or after January 1. 2014.

Previously we discussed Materials and Supplies. Read Post Here:

As well as  Repairs and Maintenance and Capital Expenditures. Read Post Here:

And Amounts Paid For the Acquisition or Production of Tangible Property. Read Post Here:

This time we look at: Improvements to a unit of tangible property

The final regulations continue to require the capitalization of amounts paid to improve a unit of tangible property.  A unit of property is improved when the taxpayer’s action results in:

  • A betterment to the unit of property;
  • A restoration of the unit of property;
  • The adaptation of the unit of property to a new or different use.

A unit of property consists of a group of functionally interdependent components, such as:

  • The parts of a machine, with the machine being the unit of property;
  • A building including its structural components is a unit of property, however;
  • Major systems of the buildings, such as:
    • Heating, ventilation and air conditioning;
    • Plumbing systems;
    • Electrical systems;
    • All escalators;
    • All elevators;
    • Fire protection and alarm systems;
    • Security systems;
    • Gas distribution systems;
    • Any other system defined in published guidance;

are treated as separate units of property for the purpose of determining if there has been a capitalizable betterment, restoration or adaption to the system.

The betterment of a unit of property is defined as:

  • Improving a material condition or defect that existed prior to its acquisition or during the production of the asset;
  • A material addition that includes an enlargement, expansion, extension, or addition of a major component to the unit of property or a material increase in its capacity;
  • Is an improvement that is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the unit of property.

The restoration of a property is defined as:

  • The cost of repairing property that was damaged in a casualty;
  • The final regulations have revised the casualty loss rule as follows:
    • Amounts paid to restore damaged property that would be capitalized without regard to the casualty loss must be capitalized;
    • Amounts paid to restore damaged property that would NOT be capitalized without regard to the casualty loss must be capitalized to the extent that the repair cost exceeds the adjusted basis of the property;
    • Example:  A building with a 1 million dollar adjusted basis is damaged.  The cost to repair the building is 1.5 million that includes $750,000 to replace the roof with an additional clean up and repair cost of $750,000:
      • Roof replacement cost at $750,000 must be capitalized;
      • The remaining adjusted basis: $1,000,000 minus the $750,000 roof replacement cost = $250,000.  Therefore the first $250,000 of the clean up/repair cost must be capitalized;
      • The remaining $500,000 of the clean up/repair costs can be expensed.
      • Rebuild like new:
        • The final regulations retain the rule that a capitalized restoration includes rebuilding a unit of property to a like-new condition after the end of its class life;
        • If a unit of property is returned to a condition of new, rebuilt or remanufactured under the terms of any federal regulations or the manufacturer’s original specifications, it is considered to have been rebuilt to a like new condition, however;
        • The final regulations indicate that a comprehensive maintenance program conducted according to the manufacturer’s specifications does not return a unit of property to a like-new condition.

Note: This summary is based upon information contained in a Special Report from CCH.

Read the full report here:

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.