Opportunities Remain to Make the Tangible Property Regulations Work for your 2014 TaxesJune 29, 2015
Bruce A. Desrosiers, CPA, MST
There has been much conversation about the final “repair” regulations since their implementation became mandatory. The final analysis, however, is that many of the rules are the same but “the names have been changed to protect the innocent”. Betterments, Restorations and Adaptations are the new buzzwords. There are some opportunities that should not be overlooked for those businesses and individuals who find themselves currently on extension for 2014.
As required under prior rules, it is mandatory to review facts and circumstances to determine if a cost is for a repair or improvement. The final regulations do not eliminate the Uniform Capitalization requirements of Section 263(a), which generally provides that you must capitalize the direct and allocable indirect costs of producing real or tangible personal property and acquiring property for resale.
The final regulations take existing case law and prior administrative rules and synthesize them into a framework to help you determine whether a cost is deductible as a repair and maintenance expense or must be capitalized because it's an improvement. If the amounts are not paid or incurred for an improvement to tangible property as determined under the final regulations, then the amounts generally are deductible as repairs and maintenance.
The opportunity exists within the “unit of property” rules as they apply to a building and its structural components. The Tangible Property or Repair Regulations now identify separate building systems as the measurement standard for unit of property for purposes of determining whether there has been a betterment, restoration or adaption of a building requiring capitalization under the new rules. By applying facts and circumstances to the Building Structure and systems, you can determine the need to capitalize certain expenditures, as follows:Building structure
- Building structure
- Fire protection
- Gas Distribution
- Other systems related to the operation and maintenance of buildings
Assume that every year for the last 15 years you have been repairing the roof on your manufacturing building and have been conservatively capitalizing the expenditures each year. Assuming the repairs were routine in nature, the potential exists to get a deduction for these costs on your 2014 income tax return by filing for a change in accounting method to treat these items as repairs and deduct the remaining undepreciated basis as a section 481(a) adjustment on your 2014 return. Replacing windows, sinks and toilets can have similar results.
Manufacturers also have the unique position of using some assets in the manufacturing process in such a way as to require a different tax treatment for some building systems identified above; for instance, gas distribution in which the gas is used only in blast furnaces or other systems that require heated processes. The systems normally thought to benefit a building could relate more to the process of manufacturing and require treatment as tangible personal property. This important distinction allows for depreciation recovery periods and methods that result in more rapid depreciation, such as seven-year life vs. 39-year life. The rules are applied similarly when there is a lease arrangement.
With some time left until the filing deadline in September, this may be your last opportunity to affect your 2014 taxes by reviewing depreciation and property schedules with your tax advisor now.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.