New tangible property filing requirements

Capitalizing or Deducting Under Tangible Property Regulations for Tax Year 2014

 

In late 2014 the IRS finalized the proposed regulations governing the tax treatment of amounts paid to acquire, produce or improve real or tangible property, as well as the tax treatment of certain dispositions of these items. The regulations apply to tax years beginning on or after January 1, 2014. All businesses that have depreciable assets, materials and supplies, spare parts, repairs and maintenance and/or property improvements will be affected. In general, the new regulations are favorable to the taxpayer via accelerated tax deductions.

 

The new regulations mandate a new approach to defining commonly used terms, such as supplies, repairs, maintenance, improvements, and units of property and whether they should be capitalized or expensed. The IRS offered some opportunities by allowing for routine  maintenance safe harbor, which allows taxpayers to expense certain costs that are routine and recurring, de minimis safe harbor for supplies and acquisition costs, and a safe harbor election for small taxpayers to deduct certain improvement costs.

 

Because the IRS defines many of the changes that must be adopted as changes in accounting methods, a special form must be prepared and filed for all businesses affected by the regulations. Unless you qualify for small taxpayer relief, a Form 3115, Application for Change in Accounting Method, must be filed with most 2014 tax returns that include businesses that have depreciable assets, materials and supplies, spare parts, repairs and maintenance and/or property improvements. Failure to appropriately file Form 3115 could result in lost deductions in current and future years. For all years (except 2014), the IRS charges a fee to process Form 3115, some as high as $7,000. The IRS provided some relief by waiving the filing fees for 2014 tax years and by providing an exception from Form 3115 filing for small taxpayers.

 

 

 

Your Berman Hopkins Tax Team