Final Regulations on Property Acquisition & Improvements

The sometimes extraordinary complexity of tax procedures are on full display in the IRS’s recently-released final regulations on “amounts paid to acquire, produce, or improve tangible property.”

This area of tax law has been working under temporary regulations for several years. The IRS, the American Institute of Certified Public Accountants (AICPA) and others have been working toward coming up with a clearer, simpler, and more effective way to deal with valuing and taxing tangible property.

It’s still…quite involved. The AICPA announcement on the Tax Treatment of Expenditures Related to Tangible Property Resources said,

“The final regulations contain a new safe harbor for qualifying small taxpayer ($10M or less of average gross receipts plus an eligible building with an unadjusted basis of $1M or less) and expanded routine maintenance safe harbor for buildings. In response to AICPA's concern, the final de minimis rule eliminates the ceiling amount for taxpayers with applicable financial statements (AFS) and includes taxpayers without AFS."

A major issue the regulations seek to answer is a distinction between what’s paid to acquire or improve a new item of tangible property versus the amount paid to improve tangible property already in your possession.

Within that framework the distinctions become specific and the nuances of what is, and isn’t, allowed require thorough examination and analysis.

The regulations go into effect Jan. 1, 2014. That being the case, right now is the best time to start reacting to the regulations.

Here are few suggestions as to what you can do at a minimum until you have the chance to go over the regulations with your accountant to make sure you’re in compliance and not missing opportunities to save money. There are decisions to make.

• Beginning in 2014 you can decide annually if you want to take advantage of the de minimis and safe harbor provisions in the regulations.
• By the end of 2013, taxpayers with Applicable Financial Statements (as referenced above) should create written accounting procedures for spending money on tangible property costing less than $5,000, and $500 for those without an AFS. Without this step you will be unable to take advantage of de minimis and safe harbor provisions in the final regulations.
• If you already have a written procedure in place for the years 2012 and 2013, you can in some cases file an amended return.
• Emergency spare parts are now included in materials and supplies eligible for capitalization and depreciation, so you may want to adjust your tax planning in this area in 2014
• Accounting for buildings and structural components routine maintenance costs.

If icebergs actually have tips – and they do – these suggestions are just that, the tip. That’s why it’s very important to find out as much as you can about the regulations as soon as you can – and ask your accounting arm if they’re up on them as well.