Over the past several years, the IRS has issued proposed, temporary, and in September of 2013 issued final regulations related to tangible real and personal property expenditures. Then, in August of 2014, additional final regulations were issued that provided further guidance and clarification. These tangible property regulations (TPRs) provide new rules for determining if an expenditure is a current tax deduction or a capitalized asset, new rules for the treatment of materials and supplies, and the opportunity to write-off previously capitalized costs when an asset is partially disposed. The TPRs present new risks and opportunities for all taxpayers. Real estate owners, manufacturers, and other equipment-intensive businesses will be impacted the most.

 New Requirements for Taxpayers

Substantial effort is required in order to comply with the new regulations, but that compliance generally results in a net benefit to the taxpayer. Those with a substantial amount of remaining tax basis in their real property and equipment stand to gain the most from these changes. Mandatory accounting method changes listed in the TPRs will require additional tax filings in 2014.

The risk of noncompliance is significant as these laws are applied retroactively. The TPRs require taxpayers to review every asset on their depreciation schedule and determine if that asset would have been capitalized under the new criteria. If an item does not need to be capitalized based on the new regulations, taxpayers have an opportunity to write off any remaining basis in 2014. However, if these changes are not made in 2014, these potential deductions may be lost permanently.

 These rules will require the majority of taxpayers to:

• Modify existing procedures for capitalization of an asset

• Capitalize certain materials & supplies expenditures until the items are used

• Update business practices related to landlord-tenant negotiations and itemizing removal costs on invoices

• Fully review depreciation schedules to ensure all assets are properly capitalized under the new regulations, as well as to dispose of assets that should be written off under these same regulations

• File annual elections on timely filed tax returns (including extensions)

• File at least three changes in accounting method with the IRS on their 2014 tax return

These requirements apply to any form of business (C and S corporations, partnerships, LLCs) and will include individual tax returns where the taxpayer has a sole proprietorship reported on Schedule C, a rental property reported on Schedule E, or a farming activity on Schedule F.

While the new regulations are complex, and compliance can be difficult, understanding how they impact your business is critical to maximizing your potential tax benefit. In addition to the new forms that will need to be filed with 2014 tax returns, new annual tax elections will require special consideration each year.

Your Berntson Porter advisor has the resources to assist you in determining how these new regulations will affect your business. Please contact us today at 425.454.7990.