Tangible Property Regulations: Accounting Method Change Guidance
The Internal Revenue Service and Treasury recently issued final tangible property “repair” regulations and disposition regulations (“Regulations”). These broad Regulations will likely impact most taxpayers in all industries. These Regulations generally apply to taxable years beginning on or after January 1, 2014. Failure to comply with the Regulations and guidance may result in underpayment and accuracy-related penalties and interest. Tax savings opportunities may also be available.
Some of the major provisions in the Regulations include the following method changes and elections:
Definition of the repaired or improved asset (i.e. Unit of Property)
Repair and maintenance versus improvements to property
Timing of deductions for materials and supplies
Basic capitalization/expensing threshold (i.e. de minimis expensing safe harbor)
Election to follow book capitalization of tax-deductible repair and maintenance costs
Partial disposition provisions
Representatives from the Internal Revenue Service and Treasury have stated they expect most taxpayers to file a Form 3115, Application for Change in Accounting Method, resulting in a catch-up deduction.
A few common examples where an accounting method change is necessary include:
a. A change of Unit of Property definition for applying the improvement standards
b. Adopting the routine maintenance safe harbor
c. Deducting repair and maintenance
d. A change to an accounting method that is not in compliance with the Regulations, in a case where an accounting method change was previously filed
There may be instances where business leaders believe they are already following the Regulations or adoption does not result in a current change to the timing of any deductions. The IRS, however, has stated that the rules for Unit of Property and routine maintenance safe harbor, for example, did not previously exist and it is therefore not possible for taxpayers to comply with these rules without obtaining IRS consent via a Form 3115. Where an accounting method change is required or appropriate but a request for an accounting method change is not filed, the disclosure of the position on a Form 8275-R, Regulation Disclosure Statement, will likely be required.