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The New Rules for Tangible Property Cast a Wide Net

Tangible property casts wide netAlthough there are new U.S. federal income tax developments every day, it isn’t every day that something comes out that affects virtually all business taxpayers.  This is one of those times. Known commonly as the “repair regulations” (though they go way beyond repairs), new IRS rules create new tests for determining when an expenditure relating to tangible property is deductible or must be capitalized.

It doesn’t matter if you file as a partnership, corporation, sole proprietor or other form of business.  It doesn’t matter whether you are a manufacturer, an insurance company or agency, a mutual fund advisor, a hair salon, a retail store, or a charity, or whether gross receipts are $1 or are $100 billion.  These rules impact you if you, your company/employer, or your clients’ business operations acquire, produce, or improve tangible property.

The temporary regulations generally took effect January 1, 2012, and may apply to costs that a taxpayer incurs buying materials and supplies, and acquiring or improving tangible property (improvements such as betterments, restorations and adaptations).  The rules also cover disposition of property such as sales or exchanges, retirement, and abandonment. 

Some examples of common transactions where you or your client need to analyze the proper tax treatment under these new rules include:

  • costs to replace or fix a broken window or leaking roof;
  • purchases of:
    • office furniture and fixtures;
    • a computer, or other tangible technology; or,
    • a print cartridge for an office copier or other components acquired to maintain property;
    • purchase and installation of a new furnace; and
    • retirement of building structural components such as an alarm or a plumbing system.

More often than not, taxpayers may have to capitalize expenditures they would have preferred to deduct.  However, in some cases, these changes can benefit the taxpayer, as Nathan P. Clarke explains (Tax Adviser, May 2012) as the IRS now allows write offs of replaced components.  

Definitions, terminology and rules that taxpayers have grown accustomed to over time have changed significantly as well.

What action steps should businesses take to ensure they comply?

  • Evaluate the need to file required tax forms to come into compliance with the temporary regulations for purchases or dispositions that occurred before 2012, since the tax treatment of prior year expenditures can impact future taxable income, depending on the tax method of accounting used. Most businesses will need to file one or more Form(s) 3115 in either 2012 or 2013.
  • Assess 2012 and future years’ expenditures in light of the new rules and treat accordingly for tax purposes.  This may have financial statement implications, or may lead to changes in current capitalization policies and accounting procedures.

The AICPA continues to analyze these regulations and speak out against the complexity of some of the rules on behalf of members and small businesses. Our advocacy includes written comments, as well as oral testimony before the IRS and Treasury. We have also been actively informing and educating members about these rules through articles, webcasts, conference sessions, and other tools.

We will monitor the developments in this technical area closely, while we also work on additional resources to assist members.  Expect more communications from us on this important issue through newsletters, emails, publications and other venues.

Michelle Koroghlanian, CPA, Technical Manager - Taxation, American Institute of CPAs. Michelle serves as staff liaison to the AICPA’s Tax Methods and Periods Technical Resource Panel and Exempt Organizations Technical Resource Panel, and any task forces created under these TRPs. Michelle works to develop AICPA tax policy positions, shapes and communicates the Institute’s initiatives in tax matters, and provides tax products and services for members.

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