Tangible Property Regulations (TPR) – What are they and why should I care?
February 2, 2015
We first posted a blog about the TPRs in early 2014.These regulations are the result of at least a decade of work for the Treasury Department and the Internal Revenue Service. Portions of the TPRs have been released previously in temporary form and are now final. They impact every for-profit business. This includes individuals with rental property or Schedule C businesses for the 2014 calendar year and any business entity with a tax year beginning on or after January 1, 2014. The regulations are more than 200 pages in length and are addressed through three Revenue Procedures – 2014-16, 2014-17 and 2014-54.
Overview of the Tangible Property Regulations
All businesses are required to apply the TPRs to determine whether they can deduct expenses as repairs or maintenance or will be required to capitalize and depreciate these expenditures over the IRS mandated asset lives. The long awaited final TPRs address the tax treatment for amounts expended to acquire, produce or improve tangible property – both real property such as land, buildings and related improvements and personal property defined as any property other than real property such as machinery, furniture or equipment. More specifically, the TPRs address five areas:
- Materials and supplies
- Capital expenditures in general (including consideration of the “de minimis” safe harbor guidance)
- Costs to acquire or produce tangible property
- Costs to improve tangible property
- Dispositions of property (and related components) for MACRS property and general asset accounts
Application of the Tangible Property Regulations
Due to the complexity and the wide reach of the TPRs, the application may prove burdensome. It appears that every business taxpayer will require the filing of one or more IRS Form 3115 (Accounting Method Change) filings with their 2014 tax return to report a change in accounting method or simply to acknowledge compliance with the new TPRs. These changes are considered automatic by the IRS, meaning that no prior approval is required. It is not simply a matter of filling out a form, as it appears that the TPRs are to be applied on a retroactive basis, meaning that taxpayers need to review prior year filings to determine if they expensed items that should have been capitalized (and vice versa). Any adjustment resulting from these determinations will result in recognition of taxable income or deductible expense for the 2014 tax year.
Although every business taxpayer will have to review their past practices and methodologies, as referenced above, there are certain “de minimis” safe harbors that may apply in the determination of the treatment of expenditures. For most privately-held businesses, assuming they do not have their financial statements audited, the taxpayer may claim a current expense for tax purposes in line with their treatment for internal book purposes for items with a cost of $500 or less if:
- The taxpayer has accounting procedures for internal book purposes that provide for a “de minimis” policy for purchases of tangible property (below a certain dollar threshold and/or with an economic useful life of 12 months or less), AND
- The accounting procedures were followed and in place at the beginning of the tax year (these procedures should be documented in written form)
Utilization of the “de minimis” safe harbor will require an annual election to be attached to a timely filed (including extensions) original tax return filing.
In summary, all business taxpayers will need to go through this analysis as they prepare and file their calendar year 2014 tax returns:
- Develop and maintain a written accounting policy for the capitalization of fixed assets including a “de minimis” policy for applicable tangible property expenditures
- Consistently apply those policies for both internal book and tax reporting purposes
- File one or more Form 3115s to report the change in accounting method for the 2014 year including the impact on income or expenses from a review of prior year’s capitalized assets or expensed items to ensure these expenditures are brought into compliance with the TPRs, your policies and the Form 3115 assertions
- File an annual election statement regarding expenditures expensed under the “de minimis” safe harbor policy adopted by the taxpayer