Omaha TEI PresentationTangible property temporary regulations Omaha, NESeptember 18, 2012 • Bryan Pleskac Deloitte Tax LLP • Ray Wilson Deloitte Tax LLP
Outline • Effective Dates/Transition Guidance • Temporary Regulations • Discussion Areas • Materials and Supplies • De Minimus Rule • Units of property • Amounts paid to improve property • Routine maintenance safe harbor • Buildings • Disposition, retirements & general asset accounts • Transition Guidance/LB&I Directive • Action steps
Effective Dates • Temporary Regulations are generally effective for taxable years beginning on or after January 1, 2012 • Special rules apply for amounts paid or incurred in taxable years beginning on or after January 1, 2012 for: • Materials and supplies • De minimis rule • Costs to facilitate • Transition guidance issued March 7, 2012 (Rev. Proc. 2012-19 and 2012-20) • Effective for taxable years starting after January 1, 2012 • 19 possible method changes under the guidance • All automatic changes! • Must file with 2012 or 2013 return
Temporary Regulations • Discussion Areas • Materials and supplies • De Minimus rule • Amounts paid to improve property • Buildings • Retirements, dispositions and general asset account election
Materials and Supplies – General Rules • Material and supplies are tangible property used or consumed in the taxpayer’s operations that is not inventory and is: • a component acquired to maintain, repair, or improve a unit of tangible property; • fuel, lubricants, water, or similar items that are reasonably expected to be consumed in 12 months or less; • a unit of property that has an economic useful life of 12-months or less; • a unit of property with an acquisition or production cost less than $100; or • property identified in future published guidance • If the criteria above met, the item is deemed to be a “material or supply”, and therefore, not subject to capitalization. • Optional election to capitalize and depreciate the materials and supplies • Special rules for rotable and temporary spare parts
Materials and Supplies – Issues and Considerations • What you need to consider: • What has changed? • Materials and supplies definition has been provided • Special methods for rotable spare parts • Current treatment of materials and supplies? • Timing of deductions - Incidental vs. Non-incidental (e.g. are supplies tracked?) • Existence of rotables and current treatment • Opportunities within the Temporary Regulations • Expanded definition of materials and supplies (e.g. $100 items) • Review balance sheet for material and supplies inventories and consider if these items are tracked for their usage • Election to capitalize (e.g. NOL preservation)
De Minimis Rule - Example To be eligible for the de minimis rule, the total aggregate amounts paid and not capitalized by the taxpayer must be less than or equal to the greater of $125,000 (0.1 % of its total gross receipts of $125M) or $140,000 (2 % of its total book depreciation/amortization $7M). Because the taxpayer pays $160,000 for the computers and this amount exceeds $140,000, it may not apply the de minimis rule to the total amounts paid for the 400 computers. To be eligible for the de minimis rule, the total aggregate amounts paid and not capitalized by the taxpayer must be less than or equal to the greater of $125,000 (0.1 % of its total gross receipts of $125M) or $140,000 (2 % of its total book depreciation/amortization $7M). Because the taxpayer pays $160,000 for the computers and this amount exceeds $140,000, it may not apply the de minimis rule to the total amounts paid for the 400 computers. However, if it makes an election to capitalize $20,000, the amounts paid to acquire 50 of the 400 computers purchased in Year 1, it would not be required to capitalize the amounts paid to acquire the 350 computers in Year 1.
De Minimis Rule – Issues and Considerations • What you need to consider: • What has changed? • Previously no rules or guidance on capitalization thresholds; the temporary regulations now provide that guidance • Identification of expenses to consider for the de minimis threshold • Identify trial balance account containing tangible property • Items qualifying as materials and supplies or repairs and maintenance (e.g. reduction of expenses for de minimis calculation) • Items not related to tangible property (e.g. deductible repairs and services) • Policy, system updates, and documentation • Is the policy being followed (e.g. expenditures outside of policy limit currently deducted)? • System updates for expenditure tracking on a go-forward basis (e.g. quantity fields, account mapping, description field assignments, etc.) • Document accounts and create calculation templates for compliance workpapers
Amounts Paid to Acquire or Produce Tangible Property - Temp. Reg. § 1.263(a)-2T
Amounts Paid to Improve Property • What you need to consider: • What has changed? • More clearly defined criteria to determine deductible repairs • Review prior repairs studies for impact of changes pursuant to the Tangible Property Regulations • Review previously claimed repairs and maintenance expenditures (e.g. line 14) deducted for both book and tax purposes • Review fixed asset ledgers for additional repair and maintenance reclassification opportunities pursuant to the Temporary Regulations • System Updates, Documentation, and Policy Changes: • Updates to capital request forms for tax “unit of property” and tax repairs requirements (e.g. checklists) • Provide training sessions to facility managers and engineers to assist in the identification of tax improvements and repairs • System updates for units of property, tax only repairs, and documentation of positions
Routine Maintenance Safe Harbor – Temp. Reg. § 1.263(a)-3T(f)
Buildings – Issues and Considerations • What you need to consider: • What has changed? • Unit of property for building repairs and retirements re-defined • Building systems defined • Application to leased property • Identification and basis determination: • Cost segregation studies, Building construction information (e.g. AIA documents), Other reasonable methods, etc. for basis determination • Consider effect of reclassification or cost segregation studies on unit of property • Policy, System Updates, and Documentation • Identify building systems during construction and segregate in fixed asset systems • Update capital request forms for building system specific questions for future projects • Document and create calculation templates for compliance workpapers to show break out of building systems and basis information
Dispositions, Retirements & General Asset Accounts (Temp. Reg. §§ 1.167-8T and 1.168(i)-1T)
Dispositions and Retirements Gain/loss recognized on retirement of a structural component of a building (now defined as a disposition) Loss (but not gain) recognized on the physical abandonment or transfer to supplies or scrap account (applies to components of buildings as well) Taxpayer may elect to treat a component of a UoP in a general asset account as a specific asset and deduct undepreciated basis at disposition A taxpayer is not precluded from claiming a repair deduction under the casualty loss restoration test for a UoP included in general asset
General Asset Accounts (GAA) Elective Assets may be grouped into a single GAA if— • Same depreciation method (cannot combine bonus and non-bonus) • Same recovery period • Same convention (must be placed in service in same month, quarter, etc.); and • Placed in service in same taxable year • A single asset can be placed into a GAA • If GAA elected, no loss on disposition recognized until all assets in GAA disposed of • Can elect to treat a component of an asset as a single asset for disposition purposes • Structural components of buildings generally defined under section 48 regulations • Definition of component must be consistently used for all assets in a single GAA • Election provides flexibility in determining whether to take a loss on a disposition or possibility a deduction for repairs costs (assuming such costs are not a capitalizable improvement)
Retirements, Dispositions & General Asset Accounts – Issues and Considerations What you need to consider: • What has changed? • Treatment/timing of real property retirements/dispositions • Timing for recognition of gains and losses • Current retirements methodology (e.g. retiring structural components of buildings) and conformation to Tangible Property Regulations • Additional retirement opportunities and impact on repair expenditures (e.g. reverse prior retirements to sustain repair position) • Application of GAA elections: • Elect GAA on building property (leased and owned) to minimize compliance and avoid lost deductions (e.g. allowed or allowable) • Need for GAA elections for personal property (e.g. different book and tax units)
Transition Guidance • Rev. Procs. 2012-19 and 2012-20 issued March 7, 2012 • Automatic consent for method changes to comply with temporary regulations for taxable years beginning on or after January 1, 2012 • Form 3115s due by extended due date of the return for the tax year of change • Temporary regulations cannot be early adopted under this guidance • Scope limitations waived for first and second tax years beginning after December 31, 2011 • Taxpayers receive back year audit protection upon filing national office copy of Form 3115 • National office copy sent to Ogden, UT • Taxpayers file a single Form 3115 for all concurrent changes under §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, 1.263(a)-3T • Special rules may apply for concurrent depreciation changes • Must take into account § 263A
LB&I Directive (LB&I-4-0312-004 (3/15/12)) • IRS to discontinue current exams with respect to positions taken on original returns relating to— • Whether costs incurred to maintain, replace, or improve tangible property must be capitalized under IRC § 263(a) • Correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components) • Does not apply to exam activity relating to costs for which the IRS has provided specific guidance separate from the temporary regulations • For accounting method changes on or after 12/23/2011 for a tax year beginning before 1/1/2012, exam is to risk-assess the Form 3115 • For taxable years beginning on or after 1/1/2012 and before 1/1/2014, exam to determine if taxpayer filed method change pursuant to guidance during scope waiver period
Determine how your company will accomplish the following… • Understand how the definitions of materials and supplies, UoP improvement, betterment, and routine maintenance affect the way your business capitalizes or deducts assets • Understand how the de minimis rule might affect your capitalization threshold • Consider how the favorable rules relating to facilitative costs apply in your business • Understand whether and to what extent your business currently accounts for dispositions and what the appropriate method(s) might be under the temporary regulations • Consider completing an assessment in advance of adopting the Temporary Regulations to determine potential impact and possible system limitations
Contact info Bryan Pleskac 402 997 7816 firstname.lastname@example.org Ray Wilson 612 397 4704 email@example.com
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