If you currently own, purchase or acquire tangible property for business or rental purposes, new regulations issued in 2014 require additional compliance, but also provide additional opportunities for you to generate tax savings. Property affected by these new rules include: buildings, land improvements, equipment, machinery, materials and supplies. Virtually all business will be impacted by the procedures in one way or another.
Some of the key issues addressed in the regulations are:
- Establishing new safe harbor limits on capitalization vs. expense.
- Outlining new criteria to distinguish between capital expenditures from supplies, repairs or maintenance items.
- Providing additional guidelines to determine the appropriate units of property for capitalization and disposition of assets.
- Establishing new rules which will allow taxpayers to write-off prior year assets and prior leasehold improvements.
- Modified the rules to comply with the repair and capitalization reporting requirements and established new filing requirements and procedures to take advantage of the benefits inherent these new regulations.
Perhaps the biggest opportunity presented by these new rules is to allow property owners the ability to deduct the remaining basis of certain components of a building upon replacement or removal. This was something that was not allowed in the past and is a significant opportunity for some taxpayers. For example, let’s assume a taxpayer has a roof with a remaining basis of $40,000 that needs to be completely replaced at a cost of $100,000 on a commercial rental. The new roof is required to be capitalized and depreciated over 39 years. Under the old rules the remaining $40,000 in basis of the old roof could not be deducted but had to remain on the books and continue to be depreciated. Under the new rules the remaining $40,000 basis can, in many cases, be deducted, which is a significant benefit to the taxpayer.
Taxpayers can apply these rules to events that occurred in 2012 or 2013. In order to do so taxpayers must take action with the filing of their timely filed 2014 tax returns or the opportunity will be lost.
In general, the rules are complex but taxpayer friendly. Initially, in order to comply with these new rules many taxpayers would have had to request from the IRS a change in accounting method by filing Form 3115. Under pressure from the accounting community on Friday, February 13th, the IRS released Revenue Procedure 2015-20 which granted relief to taxpayers whose total assets and whose total average annual gross receipts are under 10 million. This relief allows qualifying taxpayers to comply with the new regulations on a cut-off basis beginning on January 1, 2014 without the need to file Form 3115. Please note, if a taxpayer wants to look back to 2012 or 2013 filing a Form 3115 is still required. In addition, Form 3115 will still be needed in cases were taxpayers don’t meet the 10 million requirements.
To find out more and to learn how these new rules will affect your particular business, please contact SRG. We can provide comprehensive consulting related to these new regulations and help your business comply with these new rules and take advantage of the opportunities they present.
Giancarlo Laguercia, CPA, MST