Final Tangible Property Regulations: Action Required before January 1, 2014
In September 2013, the IRS issued final regulations dealing with expenditures for acquiring, maintaining, repairing and replacing tangible property. The regulations are commonly known as the “tangible property regulations” or the “repair regulations.” Although the final regulations are effective for tax years beginning on or after January 1, 2014, certain aspects of the final regulations are available for tax years beginning on or after January 1, 2012. To help taxpayers adopt and implement the new regulations, the IRS has announced that it will be issuing transitional guidance for taxpayers no later than December 2013.
In several ways, the final regulations are an improvement over the temporary regulations. One such regulation that was improved allows the immediate expensing of assets acquired that are below a minimum cost threshold. This regulation is known as the de minimis safe harbor. In addition to permitting taxpayers without an Applicable Financial Statement (AFS) (described below) to adopt the de minimis rule, the definition of tangible property eligible for immediate expensing was expanded to include property with a useful life of 12 months or less. The temporary regulations also had provided a ceiling rule under which the maximum amount that could be expensed annually was limited, based on a percentage of gross receipts for the tax year or a percentage of the taxpayer’s total depreciation and amortization expense for the tax year as determined in the taxpayer’s AFS. The final regulations removed the ceiling rule.
Under both the temporary and final regulations, different rules apply to taxpayers who file an AFS and those who don’t. Before discussing the new rules under the final regulations, it is important to understand what an AFS is. The final regulations define an AFS as one of the following:
- A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders);
- A certified audited financial statement that is accompanied by the report of an independent certified public accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for:
- Credit purposes;
- Reporting to shareholders, partners, or similar persons; or
- Any other substantial non-tax purpose; or
- A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or the Internal Revenue Service).
Taxpayers with an AFS can elect to expense amounts paid of up to $5,000 per invoice (or per item as stated on the invoice) or amounts paid for property with an economic useful life of 12 months or less. Taxpayers without an AFS can elect to expense amounts paid of up to $500 per invoice (or per item as stated on the invoice) or amounts paid for property with an economic useful life of 12 months or less. Whether or not the taxpayer has an AFS, the taxpayer must treat the amount as an expense on its books and records.
In order to take advantage of these rules, the taxpayer must have written accounting procedures in place at the beginning of its tax year. For example, if a calendar year taxpayer wishes to elect the de minimis safe harbor rule for its 2014 tax year (beginning January 1, 2014 and ending December 31, 2014) it must have those written accounting procedures in place by December 31, 2013. Therefore, taxpayers wishing to take advantage of these new, higher expensing thresholds need to take steps now to ensure that their accounting procedures are properly written. It should be noted that although a taxpayer may have written accounting procedures in place at the beginning of the year, and even though it does expense all asset acquisitions beneath the threshold, it is not obligated to make the tax election and expense on its tax return what it has expensed in its accounting books and records. This gives taxpayers the opportunity to base their decision to make the election for tax purposes on facts and circumstances that are known, before the tax return is actually filed.
While the new rules offer higher expensing thresholds, other factors and limitations must be considered. For example, if a taxpayer purchases property that is or is intended to be included in inventory, then the de minimis safe harbor does not apply.