IRS Final Tangible Property Regulations
SACRAMENTO-In a development that will affect almost all taxpayers, particularly those that hold real estate, the IRS has issued long-awaited final regulations affecting costs incurred to acquire, maintain, and improve tangible real and personal property and proposed regulations related to the disposition of assets. The new regulations will generally apply to tax years beginning on or after January 1, 2014.
The regulations are the result of a nearly 10-year project by the IRS that included several rounds of proposed and temporary rules. The changes are generally taxpayer-favorable, owing to the expansion of the rules to allow additional deductions and the simplification of some of the complex administrative issues considered too burdensome under the temporary regulations.
Let’s look at some of the significant changes that will affect holders of real property.
De Minimis Expensing Rule
This area underwent significant changes from the temporary regulations. The final regulations provide a de minimis safe harbor election that generally allows a company to follow its financial statement capitalization policy for tax purposes for amounts paid to acquire or produce a unit of property if said amounts are below a specified threshold or if the property has an economic useful life of less than 12 months.
The requirements of the de minimis safe harbor vary based on whether your company has an applicable financial statement (AFS). A company has an AFS if its financial statement is either:
- Filed with the SEC
- Audited by an independent CPA and used for credit purposes, reporting to shareholders, or another nontax purpose (note that reviewed or compiled financial statements don’t satisfy this requirement)
- Required to be provided to a federal or state government or agency
A company with an AFS may use the de minimis safe harbor to deduct costs for acquired or produced tangible property expensed under its financial statement capitalization policy if it has a written policy in place as of the beginning of the year and its capitalization threshold doesn’t exceed $5,000.
A company without an AFS may use the de minimis safe harbor if it has accounting procedures in place as of the beginning of the year and its capitalization threshold doesn’t exceed $500. There’s no formal written requirement for companies without an AFS.
In either scenario a company with a capitalization policy in excess of the allowable thresholds may still follow its capitalization policy for tax purposes if it can demonstrate that its policy clearly reflects income. But since this is a subjective standard, in an IRS examination the company has the burden of supporting the deduction of amounts that exceed the $5,000 or $500 threshold, whichever is applicable.
The company must attach an election statement to its federal tax return, filed by the original due date (including extensions), to use the provision each tax year. This requirement applies to companies with or without an AFS.
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