On Sept. 13, 2013, two years after the 2011 temporary and proposed regulations, the Internal Revenue Service issued final and reproposed tangible property regs. There are a number of differences between the final and reproposed regulations as compared to the 2011 regs, with a stated goal of simplifying and clarifying them and making them more administrable.
The reproposed regulations address the disposition of tangible property, and those regulations are not expected to be issued in final form until 2014. The IRS also anticipates issuing additional procedural guidance as to how to implement these regulations. This transitional guidance, expected in the form of a couple of revenue procedures, is expected by November 2013.
The following is a summary of the changes made by the final and reproposed regs.
MATERIALS AND SUPPLIES
The definition of materials and supplies remained substantially the same as in the 2011 regulations, except that the dollar limit on a unit of property was doubled from $100 to $200. This is an improvement, but still less than some practitioners were hoping.
The types of materials and supplies and timing of their deduction remained substantially the same as in the 2011 regs except that, in addition to the categories of incidental, non-incidental, and rotable/temporary spare parts, a new category of standby emergency spare parts was added in the final regs.
While under the 2011 regs, a taxpayer could elect to capitalize any materials and supplies, under the final regs the election only applies to rotable, temporary or standby emergency spare parts, not to incidental and non-incidental materials and supplies.
The final regulations made some changes to the de minimis rule for expensing of acquisition costs. Under the 2011 regulations, a taxpayer could follow the treatment used for book purposes if the book expense policy is in writing at the beginning of the tax year; the amount is in fact expensed for book purposes in accordance with the written policy; the taxpayer has an applicable financial statement; and the total amount expensed is less then 0.1 percent of gross receipts for tax purposes or 2.0 percent of depreciation and amortization for book purposes.
In the final regulations, the requirement for an applicable financial statement has been relaxed somewhat. Under the final regulations, a taxpayer may follow its book expense policy if it has an applicable financial statement and the related invoice or item is less than or equal to $5,000. A taxpayer may also, however, follow its book expense policy even if it does not have an applicable financial statement if the invoice or item is less than or equal to $500. The focus has thus shifted from the total amount expensed to the value of each invoice or item. The final regulations also clarify that a change in book policy is not a change of accounting method.
IMPROVEMENTS AND REPAIRS
The routine maintenance safe harbor has been expanded to apply to buildings. For property other than buildings, the safe harbor requires that the taxpayer reasonably expects to perform maintenance on the property more than once over the class life of the property. For buildings, the taxpayer must expect to perform maintenance activities more than once in a 10-year period.
The definition of a unit of property remains similar to that in the 2011 regulations, except that leasehold improvements under the final regulations are to be treated similarly to owned property.
The definition of improvements is modified in several respects. What constitutes a betterment or a restoration is clarified, with revised examples, and there is a modified casualty loss rule and a clarification of the treatment of removal costs.
An addition not in the 2011 regulations permits a taxpayer to annually elect to capitalize otherwise deductible repairs if capitalized for book purposes. This provides taxpayers with some opportunity for simplification by utilizing the same treatment for book and tax purposes.
The reproposed regulations on dispositions modify the 2011 regs by replacing a mandatory recognition of gain or loss on disposition of a structural component of a building with an optional annual election to recognize gain or loss on partial dispositions. While the 2011 regs put a lot of emphasis on grouping of assets into general asset accounts, as a way to avoid the mandatory recognition of gain or loss on the disposition of a structural component, the final regs move away from that approach, with more flexibility to elect gain or loss on a partial disposition where the assets are not grouped into GAAs. The regs also add alternative methods for determining the portion of basis attributable to a component.
These regs were reproposed because of the significant changes made to the treatment of dispositions. The IRS expects to finalize them in 2014. For 2012 and 2013, taxpayers can choose to apply the 2011 temporary regs, the 2013 proposed regs, or the 2014 final regs. It is anticipated that, for the 2014 tax year and beyond, taxpayers will be required to apply the 2014 final regulations.
It is also anticipated that the procedural guidance expected by November 2013 will address the unwinding of elections and allowing elections to be made on amended returns, a departure from the normal requirement to make elections on original returns.
The final and reproposed regs on the whole are good news, as they provide more clarity and more simplification than the 2011 regs. Some actions based on the 2011 regs, such as GAA elections, may not look so attractive now that the final and reproposed regulations have been issued. It is anticipated that the forthcoming procedural guidance will provide an opportunity to revisit those elections. It is very likely that many taxpayers will be looking to their tax advisors for assistance implementing these changes, and in the submission of multiple Form 3115s for changes of accounting method as they sort out the options, elections and safe harbors available under these new regulations.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a part of Wolters Kluwer.
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