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2014 Depreciation Update 2013 2014 Section 179 Expense Investment Limit $ 2,000,000 $ 200,000 Expense Limit $ 500,000 $ 25,000 Bonus Depreciation 50% 0% (Set to expire on 12/31/2013) 2
THE FINAL REGS ARE HERE! 3
Why is This Important to You? All businesses likely will be affected by the tangible asset regulations. Taxpayers will need to review current capitalization policies/methods. Many taxpayers may need to file method changes. Changes might have financial statement implications. Companies may need/want to make changes to fixed asset accounting systems. 4
General Framework Retained Materials and supplies 1.162-3 Costs to acquire or produce tangible property 1.263(a)-2 Costs to improve tangible property 1.263(a)-3 Dispositions/ general asset accounts Prop. Reg. 1.168(i)- 1, 7, and 8 5
2014 Effective Date Tangible asset regulations generally effective for taxable years beginning on or after January 1, 2014 However, final regulations only apply to amounts paid or incurred after January 1, 2014 for taxable years beginning on or after January 1, 2014 for: Materials and supplies De minimis rule Costs to facilitate 6
De Minimis Rule Revised and Simplified Reg. 1.162-3(f) and 1.263(a)-1(f) 7
De Minimis Rule Taxpayer with AFS Written accounting procedure at the beginning of the taxable year $5,000 per invoice/per item limit, or economic useful life less than 12 months 1,2 Treats amounts as an expense on AFS accordingly Taxpayer without AFS Accounting procedures at beginning of the taxable year $500 per invoice/per item limit, or economic useful life less than 12 months 1,2 Treats amounts as expense on books and records accordingly 1 Can reach agreement in IRS exam to exceed dollar limits set forth in final regulations 2 Rule specifically prohibits componentization of an item of property to avoid the dollar limitation 8
De Minimis Rule (cont.) Additional considerations Rule must be applied to all qualifying costs, including materials and supplies Clarification of treatment of additional/transaction costs incurred to acquire tangible property On invoice of property vs. separate invoice Interaction with Section 263A (related to property produced or acquired for resale by taxpayer) IRC Section 263A takes precedence over these new regulations Tax return implications Annual election included on tax return 9
Materials and Supplies Reg. 1.162-3 10
Materials and Supplies Revised Definition Component acquired to maintain, re pair, or improve UoP 1 Property identified in published guidance Tangible property used/consumed in operations (NOT inventory) Fuel, lubricant s, and water expected to be consumed in 12 months 2 UoP with acquisition or production cost $200 UoP with economic useful life of 12 months 2 1 Must not have been acquired as part of any single UOP 2 Beginning when used in taxpayer s operations 11
Materials and Supplies General Rule Non-incidental materials and supplies deductible when first used or consumed Incidental material and supplies deductible when paid Updates in Final Regulations Definition expanded to include property with acquisition or production cost of $200 or less (increased from $100 or less) Materials and supplies are considered a qualifying expense under the de minimis election. If de minimis election is in place, must apply de minimis safe harbor to materials and supplies 12
Example 1 Taxpayer purchases 20 laptop computers for $800 per item. The computers are expected to be in use for greater than 12 months. In addition, the invoice shows delivery charges of $500. The taxpayer does have a written accounting policy in place during the year to expense amounts paid for property costing less than $2,000. The taxpayer adheres to the policy for book purposes. The taxpayer does elect to apply the de minimis safe harbor to the current tax year. Taxpayer has AFS Taxpayer may elect to deduct these amounts as ordinary and necessary business expenses. Taxpayer does not have AFS Taxpayer is required to capitalize the cost of the laptops because the cost per item exceeds $500. The laptops will not be considered a material or supply because they do not meet the requirements. 13
Amounts Paid to Improve Tangible Property Reg. 1.263(a)-3 14
Definition of Improvement Retained With Clarification Taxpayers must capitalize the amounts paid to improve a unit of property (UoP) Improvement includes: A betterment to the unit of property Clarified definition of betterment standard, eliminating results in language A restoration of the unit of property An adaptation of the unit of property to a new or different use 15
Unit of Property Definition Retained Definition is retained UoP consist of all components that are functionally interdependent Special rules retained for Building Leased property Plant property Network assets 16
Unit of Property for Buildings Rules Retained UoP is the building and its structural components Building structure, which is defined as the building and its structural components (other than the sub-systems above) Each building system HVAC system Plumbing system Electrical system Escalators Elevators Fire protection and alarm system Security system Gas distribution system Other structural components as defined in published guidance 17
Unit of Property for Leased Property Buildings UoP is the portion of the building structure and building systems that are leased 18
Other Updates to Improvement Regulations Improvement costs Clarification on treatment of improvement costs Capitalize direct and indirect costs Clarification regarding treatment of removal costs If a taxable disposition, deduct removal costs If not a disposition, deduct or capitalize removal costs based on whether directly benefit or are incurred by reason of a repair or improvement 19
Small Taxpayer Safe Harbor for Buildings Definition of a qualifying small taxpayer Average annual gross receipts of $10,000,000 or less during the last three preceding tax years Building owned or leased by the taxpayer has an unadjusted basis of $1,000,000 or less Safe Harbor Can deduct the cost of the improvement if the total amount paid for repairs, maintenance, improvements, and similar activities during the year does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building (without application of the de minimis or routine maintenance safe harbor) Applied on a building-by-building basis Annual election made on the tax return 20
Routine Maintenance Safe Harbor Extended to Buildings 21
Routine Maintenance Safe Harbor Now Includes Buildings Routine and recurring amounts paid to keep UoP in ordinary efficient working condition do not improve the UoP Only applies if taxpayer reasonably expects to perform activity more than once during the UoP s ADS class life BUILDING UPDATE: During a 10-year period for buildings Does not apply to: Replacement of component deducted as loss Replacement of component and basis adjusted for sale or exchange Repair of component after casualty, if basis adjusted Return of UoP to operating condition if in state of nonfunctional disrepair Rotable spare parts for which optional method is elected Consider recurring nature of activity, taxpayer s experience, manufacturer recommendations, and industry practice 22
Example 2 In 2012, the taxpayer acquires a large retail mall in which it leases space to retailers. The mall contains a large escalator system of 40 escalators, including landing platforms, handrails, tracks, steps, etc. The taxpayer reasonably expects it would need to replace handrails on the escalators every 4 years to keep the system in its ordinary efficient operating condition. In year 4, a routine inspection occurs and it is determined the handrails need to be replaced. The cost of the replacement is $15,000. Is this a capitalized cost or an expense? The handrails are part of a building system. The taxpayer expects to replace the handrails more than once during the 10 year period beginning when the building system was placed in service. Given the replacement does not meet any exceptions, the replacement will fall under the routine maintenance safe harbor and will not be required to be capitalized. 23
Capitalization of Repair and Maintenance Costs Taxpayer can elect to capitalize repair and maintenance costs Requirements Taxpayer must capitalized for books Taxpayer must apply treatment to all amounts paid for repair and maintenance capitalized for books during the year Election to capitalize is made annually on a timely-filed tax return 24
Dispositions of MACRS Property Proposed Regulations 25
Dispositions of MACRS Property Dispositions of MACRS property include Sale or exchange Retirement Physical abandonment Destruction (including casualty) Transfer to supplies, scrap, or similar account Involuntary conversion Retirement of a structural component of a building GAA election no longer required Forgo loss on dispositions of structural components Partial disposition election 26
To be Determined Final regulations provide for many annual elections that impact the treatment of current year costs How do we implement changes to methods already set up to comply with final regulations? Form 3115, Change in Accounting Methods IRS will issue further guidance by year end 2013 27
Questions 28
Contact Information Tom Wright, CPA Padgett, Stratemann & Co., L.L.P. AUSTIN 811 Barton Springs, Suite 550 Austin, Texas 78704-1149 512.476.0717 SAN ANTONIO 100 NE Loop 410, Suite 1100 San Antonio, Texas 78216-4704 210.828.6281 tom.wright@padgett-cpa.com www.padgett-cpa.com 29