How new rules change tax treatment of expenditures Featured

7:17am EDT March 1, 2013
Tom Tyler, Partner, Crowe Horwath LLP Tom Tyler, Partner, Crowe Horwath LLP

Businesses have been given more time to prepare for changes in the way they account for expenses related to tangible property, but it might be advantageous to get an early start.

The U.S. Department of the Treasury issued temporary regulations that were to be effective in 2012, but the Treasury and IRS revised the effective date to Jan. 1, 2014. Final regulations that include the new effective date are expected in 2013.

“The regulations focus primarily on whether an expenditure is for immediately deductible repairs and maintenance or for capital improvements that must be depreciated over time. An expenditure on tangible property can be a current deduction if it’s considered incidental in nature and doesn’t add to the value of the property or prolong its useful life,” says Tom Tyler, partner at Crowe Horwath LLP.

“The temporary regulations are of particular interest to businesses with significant amounts of brick-and-mortar properties or to machinery-intensive businesses,” he says.

Smart Business spoke with Tyler about the regulations and what businesses should do to prepare for the change.

Should businesses act now or wait for final regulations?

The IRS announced the change to the effective date on Nov. 20, 2012. The revised date covers tax years beginning on or after Jan. 1, 2014. However, taxpayers can early-adopt the regulations for their 2012 and/or 2013 tax years. The early adoption allowance is an acknowledgement on the Treasury’s part that taxpayers might have already expended resources in order to adopt the temporary regulations. Taxpayers still can apply the temporary regulations as long as they file an accounting method change if the final regulations turn out to be different.

Potential corporate tax reform also could affect decisions regarding tangible property. Because of that, it’s advisable to evaluate the effects of the final regulations now, regardless of whether you’re going to adopt them in advance of the required date.

Is the final version expected to vary much from the temporary regulations?

There were sections of the temporary regulations that generated a lot of feedback from taxpayers and practitioners, and the Treasury likely will incorporate that feedback into the final regulations. For example, there is a new de minimis rule that exempts certain acquisitions from capitalization. If it’s under a certain threshold dollar amount, a taxpayer can deduct the purchase price of the property for tax purposes as long as it follows a written expense policy and has an applicable financial statement. Under the rule, the amount paid and expensed must be less than or equal to the greater of 0.1 percent of gross receipts for income tax purposes or 2 percent of the total depreciation and amortization expense for the tax year.

Treasury officials have suggested the de minimis rule might be expanded to taxpayers without audited financial statements, and they may revise the way the ceiling limitation is computed. Temporary regulations regarding dispositions and safe harbor for routine maintenance also are likely to be revised.

What steps should businesses take now?

Don’t hold off on implementation plans; instead, proceed while bearing in mind the effect of potential revisions. If the de minimis rule is expanded but retains the written policy requirement, businesses should establish a written capitalization policy for financial reporting purposes by the first day of the tax year they want to apply those rules.

Additionally, taxpayers might need to file an accounting method change if the final regulations differ from the temporary ones, even if no changes are made to the deductions claimed under the temporary regulations.

Taxpayers should weigh the pros and cons of the options outlined by the Treasury and IRS to determine the most advantageous approach. Those options are:

  • Adopt the final regulations in 2014 with their 2014 tax return.

  • Early adopt the final regulations with their 2012 or 2013 tax return.

  • Adopt temporary regulations with their 2012 or 2013 tax return with the possibility of filing a second method change to adopt the final regulations for the 2014 tax year.

WEBSITE: To learn more about K-1 Navigator, a Web-based tax compliance management system, visit crowehorwath.com/k1navigator.

Tom Tyler is a partner at Crowe Horwath LLP. Reach him at (214) 777-5250 or tom.tyler@crowehorwath.com.

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