Pub. 3 Issue 2

20 www.glancda.org New IRS Rules for Owning and Leasing Property T he Internal Revenue Service has spent much of the last ten years drafting new rules that affect any taxpayer who owns or leases any type of property. These regulations are a significant step forward by the IRS in its effort to bring consistency and clarity to the rules regarding how to treat costs incurred to acquire, maintain, and improve property. This topic has historically been an area of contention and litigation between taxpayers and the IRS. The new regulations are generally effective for tax years beginning on or after 1/1/2014, which means tax returns being prepared and filed right now will be impacted. Scope of Regulations All taxpayers that own or lease tangible property are affected by the regulations. If you have depreciable fixed assets, repairs expenses, or materials and supplies, you will be impacted by these regulations. The regulations’ reach is not limited to a certain type of taxpayer or industry. They affect a dealership as well as the entity or individual that dealership may lease its facility from. Additionally, the regulations’ reach is not limited to only large taxpayers. However, as discussed later, simplified compliance procedures are available for qualifying small taxpayers. People often refer to the new rules as the “repair regulations”. Unfortunately, doing so understates the breadth of the regulations as they are relevant at every stage of the life cycle of property – from acquisition to improvement to disposition. Taxpayers that fail to recognize the full extent of the tangible property regulations may find themselves out of compliance or overlook material opportunities – some of which are available for the 2014 tax year only. Potential Opportunities Many are surprised to learn that several provisions in the tangible property regulations are actually taxpayer-friendly and may result in tax deferral and/or savings opportunities for those taxpayers which choose to take advantage of them. Four of those opportunities are outlined below. De Minimis Safe Harbor A taxpayer that elects to use the de minimis safe harbor for a tax year is permitted to expense items for tax in line with its capitalization policy used for financial reporting purposes if certain requirements are met. The safe harbor limit is either $500 or $5,000 depending on if an audited financial statement is in place for the taxpayer. Overcapitalized Repairs The regulations define an improvement as a betterment, adaptation, or restoration of a unit of property. The details of each of these are beyond the scope of this article. However, as a starting point, taxpayers should ensure they fully understand the concept of a unit of property – particularly when it comes to building property. For example, if a taxpayer incurs costs for manufacturer mandated facility improvements, there is a chance that a portion of these costs can be expensed, while a portion will need to be capitalized under the new regulations. As a general rule, if a taxpayer has strictly followed book when making repair vs. improvement determinations for tax, overcapitalization has likely occurred. The 2014 tax year provides taxpayers with a chance to review their tax fixed asset ledgers, identify any capitalized repairs, and recover the remaining basis of those repairs immediately. Partial Dispositions Under one of the more (if not most) favorable provisions in the tangible property regulations, a taxpayer may elect to dispose of a portion of an asset prior to the asset itself being