What You Need to Know About Tangible Property Regulations

The new tangible property regulations, also known as the “repair regulations,” went into effect January 1, 2014, changing the way most taxpayers think about their tangible property capitalization policies. Although the 2014 tax year presented a unique opportunity to write off prior-year capitalized repairs, taxpayers who have tangible property expenditures for 2015 may still benefit from the regulations going forward.

If you have not yet adopted the changes, here are some of the basics you need to know:

• The new regulations are intended to guide taxpayers in determining whether expenditures may be expensed or must be capitalized.
• For the 2014 tax year, taxpayers had a one-time opportunity to update their previous capitalization decisions to align with the new rules. Many taxpayers found this to be an advantageous exercise.
• Beginning with the 2014 tax year, the IRS expects all taxpayers to be in full compliance with the new regulations.

Given the complexity of the new changes, it is understandable that you might have questions. The following are a few of the most common ones.

Which 2015 expenditures can I expense under the new tangible property regulations?

The short answer is that “it depends.”  The law is quite complicated and expenditures cannot be analyzed in a vacuum.  There are several factors that must be analyzed to determine if the item is currently expensed or must be capitalized.

So I can potentially expense all of my repairs? There’s got to be a catch, right?

No catch! The key takeaway here is that cost may not be the predominant factor in determining whether the project results in a deductible repair or capitalized improvement.  That surprises most taxpayers, who have been bound by internal capitalization policies to capitalize expenditures exceeding a specified dollar amount.

Is it too late to take advantage of the big tax-saving opportunities?

While the time has now passed for calendar year taxpayers to take advantage of the one-time write-off for pre-2014 capitalized repairs, the law change is effective for the 2014 tax year and all future tax years.  That means that any new repairs may now qualify for immediate expensing for tax purposes. So you can still take advantage of the new regulations!

Complying with these new regulations seems like a huge administrative burden.  What’s the risk for maintaining status quo with my capitalization policies?

Besides leaving potentially large tax deductions on the table, there is a risk to taxpayers for failing to comply with these new regulations.  If you continue to capitalize and depreciate repairs that should have been expensed under the new regulations, the IRS could potentially disallow the depreciation expense.

Ok, I’m convinced.  I will comply. Does my expensing policy for tax have to mirror what I expense for Generally Accepted Accounting Principles (GAAP)?

Other than the de minimis safe harbor, you do not need book-tax conformity.  That means you may capitalize a repair for financial statement purposes, but still deduct it on your tax return.

If you’re still trying to implement internal accounting policies and procedures to comply with the new repair regulations, it may seem overwhelming. However, with a little planning and help from a tax professional, it is possible to adapt your processes to comply with the tangible property regulations and potentially reap significant benefits in the process.