The Tangible Property Regulations: Elections and Safe Harbors

The tangible property regulations have gone into effect for tax years beginning in 2014 and apply to all taxpayers who have tangible property.  We previously released Tangible Property Regulations Advisors to clarify the guidance the IRS provided on the following classifications:

• Materials & Supplies
• Amounts Paid to Acquire or Produce Property
• Opportunities in Property Improvements and Repairs and Maintenance

While these previous advisors explained the areas affected and details of the tangible property regulations, the focus of this advisor is to recap the opportunities available with elections and safe harbors for your current year return.

Elections available on 2014 tax returns:

• De minimis safe harbor – An annual election to follow the book capitalization policy can be made if a conforming written policy is in place at the beginning of the year.  For businesses with an applicable financial statement, the maximum safe harbor available is $5,000 or $500 if there is not an applicable financial statement.  The business will be able to expense those items under the safe harbor amounts.  An applicable financial statement includes an audited financial statement.
• Partial disposition election – Roof repairs or replacement of other structural components of a building in prior years, allow the opportunity to dispose a portion of the originally acquired building and take a deduction.
• Repairs and maintenance capitalization election – A taxpayer may prefer to account for certain repairs and maintenance by keeping the book and tax treatment the same.  The taxpayer can elect to follow book capitalization for tax purposes.
• Spare parts election – Taxpayers can elect to capitalize and depreciate rotable, temporary or emergency spare parts, when they are placed in service, rather than wait to recover the cost when the part is disposed.

Safe harbors available on 2014 tax returns:

• Small taxpayer real estate safe harbor – Small taxpayers with a building that originally cost less than $1 million may be eligible to expense repairs under $10,000 or 2% of the building’s adjusted basis (whichever is less).
• Routine maintenance safe harbor – other than the de minimis safe harbor included above, this may be the most advantageous item for the majority of taxpayers.  Taxpayers are able to deduct expenses paid for routine maintenance if it is expected to be performed more than once in ten years for a building, or more than once over a class life of an asset.

2014 Federal tax return reporting:

In addition to the items above, it is likely that a change of accounting form will need to be filed with your 2014 tax return.  This form communicates to the IRS that the new regulations are being followed by proactively informing them that the unit of property classifications, deducting materials and supplies under the proper method, including facilitative costs in the acquisition costs, etc., are being utilized.

The tangible property regulations are detailed and complex and provide a myriad of new rules. If you have questions or would like to discuss any of our past advisors, please contact us.