TPR UPDATE: IRS Eases Compliance Requirements; Last Chance for Accelerated Deductions
If your business owns significant tangible personal or real property, it is very likely that your tax situation will be affected by the Tangible Property Regulations (TPR). As your tax filing deadline approaches, please consider the following TPR updates from the Cherry Bekaert Accounting Methods and Credits Team.
Small Business TPR Relief
On Friday, February 13, 2015, the IRS released Revenue Procedure 2015-20, offering eligible small business taxpayers a simplified process to implement the accounting method changes to adopt the final tangible property regulations. For qualifying taxpayers, the regulations would be applied on a “cut-off” basis beginning on the first day of their new tax year starting in 2014. This Revenue Procedure eliminates the need for taxpayers to include Form 3115 and its disclosures in their tax returns. Additionally, taxpayers would not need to review fixed asset records and expense deductions taken in prior years.
However, taxpayers taking advantage of Rev. Proc. 2015-20 will miss two limited time opportunities:
a) Immediate deductions by scrubbing the fixed asset records for repairs and maintenance expenses capitalized in prior years; and
b) Immediate losses for dispositions of portions of assets that happened in prior years (i.e. Partial Dispositions).
Conversely, there is one key drawback to following Rev. Proc. 2015-20: the loss of audit protection for tax deductions or tax positions in prior year returns related to tangible property.
Taxpayers Qualified to Use Rev. Proc. 2015-20
Rev. Proc. 2015-20 applies if you have one or more separate and distinct trades or business, and each business has either:
1) total assets of less than $10 million as of the first day of the tax year of change (e.g. January 1, 2014, for a calendar year taxpayer); or
2) average annual gross receipts of $10 million or less over the prior three tax years.
The two eligibility criteria above are applied to each separate trade or business of the taxpayer as long as:
- each business maintains its own complete and separable set of books and records; and
- the separate businesses are not used to shift profits or losses between them so that the taxpayer’s income is not clearly reflected.
Common ownership of businesses by itself does not cause separate entities to combine assets or revenues for the $10 million tests. If a particular trade or business of the taxpayer does not meet one or both of these criteria, then that particular trade or business does not qualify for this simplified procedure.
Upsides to Compliance with Rev Proc. 2015-20
- Intended to have broad application to many taxpayers.
- Convenient way to quickly adopt all of the tangible property regulations; no worrying about which ones apply or do not apply.
- No need to file Form 3115 for the 2014 tax year if the taxpayer applies the changes on a cut-off basis
- Eliminates need to review prior year records.
- No IRC §481(a) adjustment to calculate.
- Taxpayers are eligible to make the annual elections under the de minimis expensing safe harbor, the small taxpayer building improvements safe harbor, and the book conformity election for capitalizing repair expenses.
Downsides to Compliance with Rev Proc. 2015-20
- No IRS audit protection will be given if you use the cut-off method for any items occurring in tax years prior to the tax year of adoption.
- No opportunity to spread a positive IRC §481(a) adjustment over four years if you have taken aggressive deductions for improvements in prior years.
- No opportunity to immediately deduct IRC §481(a) adjustment if you have conservatively capitalized repairs in prior years.
- Loss of opportunity for the one-time option to elect recognition of “late” partial dispositions.
- Loss of opportunity to clearly identify and designate the units of property to be used in applying the capitalization standards for improvements — adaptation, betterment and restoration.
If you own tangible property, we recommend that you carefully consider the advantages and disadvantages of Rev. Proc. 2015-20, as well as the limited time opportunity to review your fixed asset records for deducting both partial dispositions and capitalized repair and maintenance costs. We would be happy to discuss with you the impact of implementing all of the accounting methods found in the final tangible property regulations for acquisitions, improvements, maintenance, and dispositions of tangible property.
Partial Disposition Studies – Last Chance!
Historically, when you replaced a portion of an asset, the replacement was required to be capitalized. This left you with the original asset and the replaced portion on the fixed asset records, creating duplicate assets and duplicate depreciation deductions (e.g., a roof replacement on a building). Fortunately, under TPR, you have a limited time opportunity to remove those retired or disposed assets and take a one-time deduction for any remaining basis.
This opportunity to claim losses on partial dispositions occurring in prior tax years is only available when filing 2014 tax returns. If this accelerated loss deduction is not claimed on the 2014 tax return, then you must continue to depreciate the duplicate assets over the designated tax life.
Cherry Bekaert has been engaged to help the owners of several buildings determine how much cost should be assigned to various parts of buildings that were disposed in renovation projects. The renovations replaced certain significant components or substantial structural parts of building systems. In one case, the taxpayer owns a commercial building and modernized the elevators system. Our cost segregation engineers determined that 45 percent of the old basis in the elevators (less accumulated depreciation) qualified as a partial disposition, allowing the taxpayer to take an immediate loss deduction. In another case, the taxpayer replaced a roof on his building. Our cost segregation engineers were able to determine the cost basis of the old roof disposed, and the taxpayer can claim a loss deduction for the undepreciated basis.
For several engagements, the initial plan was for our cost segregation engineers to identify partial dispositions caused by a renovation. But under TPR, there are more opportunities to expense renovations and repairs that may have been previously capitalized. This is particularly effective if you are making tenant improvements in retail centers, multi-tenant office complexes, and apartment complexes.
We also want to help you get ready for the future. We are working with taxpayers and our cost segregation engineers to identify the costs associated with a building’s structure, and with each of eight building systems. Total costs assigned to 39-year non-residential real property are divided up among the appropriate building systems buckets. This analysis is not a full cost segregation study, but the results from this analysis can help prepare you to claim partial disposition deductions in the future, and provide information to help you make decisions about whether expenditures related to a building system are deductible repairs or capital improvements.
We would be pleased to review your fixed asset records, and discuss the nature of any improvements or renovations to assess whether you have a viable opportunity under these provisions. At no cost to you, we can provide a full scoping report outlining the possible benefits that may be obtained under a Partial Dispositions Study.
For more information, please contact your Cherry Bekaert Tax Professional.