Tangible Property Regulations (TPRs)
These tangible property regulations (TPRs) are the rules which govern the determination of whether expenditures made on assets, once they have already been placed in service, should be capitalized under the rules of 1.263(a)-1, -2, or -3, or written off under the rules of 1.162-3 or -4. There are many other aspects of the TPRs beyond these regulation sections. As the TPRs change most of how we previously determined whether expenditures should or should not be capitalized it takes a significant amount of reading/training to bring most tax return preparers into the new TPR “light”.
The IRS released these regulations in 2013 for the 2014 tax years and beyond and outlines how to treat improvements or repairs on commercial buildings. All taxpayers will be affected by these changes according to AICPA! These complex Repair Regulations define the elements outlined and create a consistent method for all taxpayers. In a nutshell, the new Tax Code via Court rulings outlines how to treat Improvements or Repairs on commercial buildings as items you must either:
- CAPITALIZE and carry on a depreciation schedule, or
- EXPENSE and are allowed to expense in the year of the expenditure.
Must Capitalize if an Improvement (RABI) or Major Expenditure:
• Improvement = Restoration, Adaptation, Betterment, Improvement (RABI)
• Major Expenditure = More than 30%-35% of the REPLACEMENT cost of the building system, structural component or unit of property
• A capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property.
Must Expense if Repair:
• If the expenditure does not materially increase capacity, productivity, efficiency, strength, quality or improve output of the building system, structural component, or Building(Unit of Property) it must be expensed.
• A repair keeps the building structure and building system in ordinary and efficient operating condition.
Questions for Property Owners and CPAs who have clients that own commercial property:
• How are you accounting for expenditures? —> Expense decision.
• How do you account for the removal of an asset? —> Partial Disposition decision.
• What did you do historically that was capitalized and now can be considered expensed —> Reversal from Capital to Expense decision.
Solutions to the Above:
• Analyze economic Impact of 2014 Repair Regulations
—> Are you compliant?
—> Are you aware of your tax savings?
• Predict impact of the regulations for your property portfolio
—> Let us provide the calculations of the repair regulations for your tax record.
• Provides compliance
• Provides economic benefits, i.e. Cash Flow
• Coordinated with your tax professional, i.e. CPA
Historical Capitalized Items
Under the new regulations, would these expenditures have to be capitalized or could they be expensed? Let us look back at items you may have capitalized since you owned the building and expense them in the current tax year. This creates economic opportunities, i.e. Cash Flow!!! Let us calculate and implement this for you.
Tangible Property Regulations create opportunities to find tax savings in these areas:
• Consulting for Capital or Expense Decision
• Partial Asset Disposition Study
• Building Systems Definition Study
• Capital Reversal To Expense Study
What we can do for you:
| Past | TPR Compliance – for taxpayers who have not yet completed the TPRs Correcting Previously Filed 3115s – there is a specific process to follow Past and Current Year Cap Ex vs. R & M – documentation; analysis in the employment of the RABI against the proper Unit of Property; conclusions |
| Present |
DMSH (De Minimis Safe Harbor) Policy– creation, adoption, documentation, creativity
Policy – creation, adoption, documentation, creativity Capitalization Policies / Budget Policy and Process – one that ties into TPRs Lease Document Consulting – how a lease is written greatly affects the TPR treatment Landlord or Tenant Consulting – on CapEx vs R & M treatment |
| Future | RRSH Consulting (for retail or restaurant) – analyze value Unit of Property (UOP) Studies – buildings, manufacturing Building System Basis Analysis |
Complying with the law is burdensome and the magnitude for every CPA firm cannot be overstated. Not only will every taxpayer with tangible property be required to file one or more 3115(s) for each accounting method change; that filing will also need to be done for each separate entity, trade or business.
Click here for Tangible Property Regulations – Frequently Asked Questions on the IRS website.