Much has been written about the new “tangible property regulations” (the “TPR”), but the period of speculation is over. The TPR took effect on January 1, 2014 and it impacts virtually any for profit business regardless of entity type (i.e. a C corporation, an S corporation, a partnership, a limited liability company and even a sole proprietorship).
Changes in Accounting Methods:
Unlike most tax law changes, the TPR requires the filing of IRS Form 3115 to report all of the requisite changes in accounting methods by all applicable taxpayers. In most circumstances, taxpayers must file multiple 3115 forms. Moreover, the 3115 forms are not just required for each accounting method change but also for each separate entity or “trade or business”. This is a dramatic change as not even the recodification of the entire Internal Revenue Code in 1986 created as many accounting change applications. Each of these forms requires multiple attachments including descriptive items, a Form 2848 Power of Attorney, and potentially a 481(a) calculation. The 481(a) calculations require the taxpayer to review the impact of the changes retroactive to the date the TPR law took effect. While no filing fees are required and automatic approvals are in effect, the necessity of having your business’ 2014 accounting methods TPR compliant is inescapable.
These accounting changes should not be glossed-over or minimized. It’s critical that your accounting records and tax depreciation schedules become fully TPR compliant or the IRS has warned that it will deny all related deductions where you’re not TPR compliant.
There are some potential tax benefits and burdens:
The TPR also imposes certain internal process burdens including the inventorying of “non-incidental” materials and supplies and establishing a capitalization policy so you’re not limited to a $ 200 maximum threshold (H&M can assist you in locating items on your depreciation schedules that fit within your new capitalization policy for a more rapid write-off).
While the TPR seems all negative, there are opportunities within these complex regulations permitting certain accelerated write-offs for such things as prior capitalized costs (like roofs, land improvements, paving, franchisor “refreshments”, and leasehold improvements) where new improvements are made. Moreover, certain previously capitalized improvements may now be classified as immediately deductible repairs. There are small business safe harbor rules with which H&M can help you see if you qualify as well as more than 150 highly subjective examples of per se expenses and potential capitalized items found within the TPR which we can ferret-out for you. To describe the TPR as byzantine would be a magnificent understatement. Seeking counsel with Holbrook & Manter, CPAs is more important now than ever.
The TPR imposes seismic, subjective, and complex tax changes from, of which, virtually no for profit enterprise is exempt. As we enter the fourth quarter of 2014, the TPR reckoning is now at hand. Please make contacting Holbrook & Manter, CPAs an urgent priority so you don’t become an IRS audit target. We’d be happy to assist you.