Are you up to speed on filing requirements for tax year 2014 as they relate to tangible property regulations and the change in accounting method for Form 3115?
Here is some vital information you need to know.
Tangible Property Regulations
The IRS has issued regulations covering the tax treatment of amounts paid to acquire, produce or improve tangible property, as well as what amounts can be deducted versus capitalized. These recently released final regulations confirm many provisions from the temporary regulations that were issued in 2011. The final regulations also refine and simplify the temporary regulations, while also adding new, safe harbor provisions. The regulations must be applied for tax years beginning after Dec. 31, 2013 (calendar or fiscal year). The following is a summary of these complex regulations:
- Capitalize or deduct: Amounts paid to improve a unit of property must be capitalized, while repairs and maintenance can be deducted.
- Unit of property (UOP): The smaller the UOP, the more likely you need to capitalize it.
- Property other than buildings: A single UOP consists of all components that are functionally interdependent.
- Buildings: Each building and its structural components are treated as one UOP.
- Deducting materials and supplies: You can deduct amounts paid to produce and acquire materials and supplies that are consumed during the year. You can also deduct UOPs that cost less than $200 (up from $100).
- De minimis safe harbor: You can deduct certain amounts that are expensed for financial accounting purposes. Businesses with applicable financial statements (AFS) can rely on the safe harbor, if no more than $5,000 per invoice was paid for the property ($500 for businesses without an AFS). To use the safe harbor, a business must have accounting procedures in place at the beginning of the year.
- Routine maintenance safe harbor: Certain expenses of routine maintenance can be deducted rather than capitalized.
- Per building safe harbor for qualifying small taxpayers: Taxpayers with average annual gross receipts of $10 million or less in the three preceding years can deduct improvements made to a building with an unadjusted basis of $1 million or less.
Change in Accounting Method (Form 3115)
In order to conform to the regulations, a taxpayer needs to change the accounting method and generate an accounting adjustment, which means most business taxpayers will need to include Form 3115 with the 2014 tax return.
The IRS has provided a temporary workaround that enables filers of business tax returns (partnerships, corporations and S corporations) to make multiple automatic accounting changes on a single Form 3115. The return can still be electronically filed without attaching a PDF file. For individual tax returns, a PDF file still needs to be attached.
Each of our professional tax products (Lacerte®, ProSeries® and Intuit® Tax Online) includes and generates the following related election statements:
- De minimis safe harbor (section 1.263(a)-1(f))
- Safe harbor for small taxpayers (1.263(a)-3(h))
- Capitalize repair and maintenance costs (1.263(a)-3(n))
For more information about how to file 3115, see Form 3115 and Regulation Change FAQs.