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Tangible Property Regulations (TPR) Issues that CFO Need to Know

Tangible Property Regulations (TPR) Issues that CFO Need to Know. Presented by Eric P. Wallace, CPA ewallace@cpabr.com. First Discussion Topic The ‘Company’ Issues. Identifying the company issues that will arise from the final tangible property regulations (TPR) implementation

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Tangible Property Regulations (TPR) Issues that CFO Need to Know

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  1. Tangible Property Regulations (TPR) Issues that CFO Need to Know Presented by Eric P. Wallace, CPA ewallace@cpabr.com

  2. First Discussion TopicThe ‘Company’ Issues • Identifying the company issues that will arise from the final tangible property regulations (TPR) implementation • Review depreciation schedules for items that need corrections • This review will guide you to issues to address for the TPRs

  3. First Discussion TopicThe ‘Company’ Issues • 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) • Consider what 3115s will have to be filed in current and future years (no later than tax year 2014)

  4. First Discussion TopicThe ‘CPA In-House’ Issues • 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)

  5. First Discussion TopicGet 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

  6. First Discussion TopicGet 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 (non-AFS DMSH and AFS DMSH)

  7. First Discussion TopicGet 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 single-member LLC • If no accounting policy in placeor 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

  8. DMSH Policy in Place Elements Non-AFS DMSH What are the required elements in an accounting policy for a non-AFS TP?

  9. 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

  10. DMSH Policy in Place Elements AFS DMSH What are the additional required elements in an accounting policy for an AFS DMSH TP?

  11. DMSH Policy in Place Elements AFS DMSH Be documented The accounting policy MUST also, before the tax year: Be communicated Have an applicable financial statement • Note: • With an AFS a TP will be writing the amounts off for financial statement

  12. Depreciation Allowable or Taken—This Issue Is ‘HUGE’ • Points • Use 2013 (i.e. tax depreciation schedules as of 12-31-2012) to correct any errors in prior year depreciation, and • 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

  13. 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

  14. 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

  15. The F and P TPR 6 PotentialNew 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 …….

  16. 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

  17. Application of the de minimis to TPR Issues §1.162-3 Rules for materials and supplies §1.162-4 Repairs and maintenance De minimis applies to all of these §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

  18. Definition of Material and Supplies • Non-incidental(includes rotable, temporary, or standby emergency spare parts) • 1 • Fuel or Bulk • 2 We now have the following groups of types of M & S, when the final TPRs are effective • Units of Property with life of less than one year • 3 • Units of Property with cost of $200 or less • 4

  19. 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 • material and supplies (M&S); • repairs and maintenance (R & M); • UoP (Unit of Property) with lives less than one year, and • 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

  20. Visual Application of the Final TPR Regulation and DMSHs

  21. Visual Application of the Final TPR Regulation and DMSHs

  22. Visual Application of the Final TPR Regulation and DMSHs

  23. Visual Application of the Final TPR Regulation and DMSHs

  24. FS required to be filed with the SEC Applicable Financial Statements • 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

  25. 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

  26. 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— • Are for a betterment to the UoP • Restore the UoP or • Adapt the UoP to a new or different use

  27. 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

  28. 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

  29. 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

  30. 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)

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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

  37. CONCLUSION

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