As discussed at Katz, Sapper & Miller’s Year-End Tax Seminar, new rules regarding the acquisition, repair, maintenance and disposition of tangible property were required to be followed by taxpayers effective Jan. 1, 2014.
With preparation of 2014 tax returns now in full force, questions about compliance with the tangible property regulations (TPRs) have created substantial uncertainty and threatened the need for additional tax season work. Specifically, the need to look back at prior years’ expenditures and the potential need to file Form 3115 have been topics heavily debated.
With Revenue Procedure 2015-20, the IRS on Friday backed away from their mandatory requirement that all taxpayers apply the TPRs to prior years. This new IRS guidance provides relief to small taxpayers, defined as businesses with:
- Total assets of less than $10 million on the first day of their 2014 tax year (for most, Jan. 1, 2014) or
- Average gross receipts from the preceding three years of $10 million or less
Qualifying small taxpayers may choose to apply the TPRs prospectively beginning Jan. 1, 2014. This option eliminates the need for taxpayers to analyze prior years’ expenditures with respect to the new regulations, and it relieves small taxpayers of the substantial administrative and tax compliance burden that accompanies such analysis.
As is often the case, when the IRS giveth, the IRS taketh away. By electing not to apply the TPRs retrospectively, taxpayers may lose an opportunity to benefit from deductions related to the disposition of assets in prior years. Additionally, if under audit the IRS challenges the treatment of prior years’ expenditures related to tangible property, taxpayers will have lost audit protection by electing not to apply the TPRs retrospectively.
To help taxpayers apply the TPRs to business expenditures, and to make decisions about whether to capitalize or deduct an expenditure, KSM has prepared general decision trees that address the following:
- Treatment of materials and supplies
- Expenditures related to buildings
- Expenditures related to non-building assets
These decision trees are not intended to address every unique situation a taxpayer may encounter, but are intended to give general guidance.
If you have questions about the meaning of this new IRS guidance and its application to your business, please contact your KSM advisor.