What Taxpayers Need to Know to Comply With the Final Tangible Property Regulations
On Sept. 13, 2013, the IRS released final regulations providing rules regarding the treatment of materials and supplies and the capitalization of expenditures for acquiring, maintaining, or improving tangible property (the final repair regulations). Additionally, on Aug. 14, 2014, the IRS issued final regulations on dispositions of tangible property, including rules for general asset accounts (GAAs) (the final disposition regulations). The final repair regulations and the final disposition regulations (the final regulations) are generally effective for tax years beginning on or after Jan. 1, 2014.1 Thus, taxpayers with short tax years beginning on or after Jan. 1, 2014, and taxpayers with 52/53-week tax years beginning at the end of December 2013 are subject to the final regulations for those tax years.2
In conjunction with the issuance of the final regulations, the IRS issued procedures for taxpayers to follow in making accounting method changes to comply with the final regulations. On Jan. 24, 2014, the government issued Rev. Proc. 2014-16, which provides the rules for taxpayers to change their accounting methods to comply with the repair regulations. On Sept. 18, 2014, the government issued Rev. Proc. 2014-54, which provides the rules for taxpayers to change their accounting methods to comply with the final disposition regulations.3
On Jan. 16, 2015, the IRS issued Rev. Proc. 2015-13 and Rev. Proc. 2015-14, which collectively provide the rules for making accounting method changes, including those to comply with the final regulations. Additionally, on Feb. 13, 2015, the IRS released Rev. Proc. 2015-20, which provides an exception to the general procedures for complying with the final regulations for certain small business taxpayers. This article begins with an overview of the final regulations before discussing the procedural guidance and what taxpayers will need to consider in complying with the final regulations, including what minimum compliance might entail for a taxpayer not eligible for the small business taxpayer exception that simply wants to continue to follow its book capitalization policies for tax purposes.
Overview of the Final Regulations
The final regulations provide rules to determine whether an amount paid4 during the lifecycle of a unit of tangible property is currently deductible or must be capitalized. Additionally, the regulations provide guidance for dispositions, which take into account the interrelationship between the disposition rules and the capitalization rules. Specifically, the final regulations provide rules covering five general areas:
- Materials and supplies (collectively "supplies");
- Capitalized costs (including the de minimis safe-harbor election);
- Costs to acquire or produce tangible property;
- Costs to improve tangible property;
- Dispositions of modified accelerated cost-recovery system (MACRS) property (including their components) and GAAs;
Although the final regulations retain many of the provisions in the Dec. 27, 2011, temporary regulations, the final regulations also clarify, modify, and simplify a number of these rules. The final regulations also include provisions intended to reduce the administrative burden of complying with the regulations. For example, many of the provisions in the final regulations are elective and do not require a method change (see Exhibit 1 describing the various elective methods under the final regulations.)
The Tax Adviser
April 01, 2015
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