After some lengthy delays, the IRS finally issued the much-anticipated Final Tangible Asset Regulations on September 13th. The Final Regulations, along with new Proposed Regulations, will have a significant impact on the treatment of amounts paid to acquire, produce or improve tangible property. The good news for taxpayers is that more companies will now be eligible for tax benefits under the “simplified” Final Regulations. The challenging part of this news is that compliance with the rules will require some additional effort and resources.
The Final Regulations replace Regulations originally proposed in August 2006, re-proposed in March 2008, and issued in temporary form in December 2011.
The Final Regulations provide a framework for distinguishing capital expenditures from deductible business expenses. The rules in the Proposed and Temporary Regulations had been criticized as “too complex” and “administratively burdensome” by several commentators, including the American Institute of Certified Public Accountants. The Regulations in Final form include a number of new safe harbors and simplification rules. However, compliance with the new rules will still require effort and allocation of resources from all taxpayers who acquire, produce or improve tangible property, regardless of the taxpayer’s size or level of sophistication.
Even those taxpayers who already made changes to comply with the Proposed or Temporary Regulations will want to re-address their positions as the Final Regulations differ from the Proposed or Temporary Regulations in many respects.
The IRS has indicated that separate procedures will be provided under which taxpayers may obtain automatic consent to change to a method of accounting provided in the Final Regulations. These procedures may modify or replace some of the 19 new automatic accounting method changes that the IRS authorized after the issuance of the Temporary Regulations nearly two years ago.
The 222-page document containing the Final Regulations is scheduled to be published in the Federal Register on September 19, 2013 and can be accessed on the Federal Register’s website. The Final Regulations apply to tax years beginning on or after January 1, 2014. However, taxpayers can elect to apply the Regulations to tax years beginning on or after January 1, 2012.
The new Proposed Regulations change the disposition rules that were in the previously issued Repair Regulations. The old disposition rules were deemed by many commentators to be some of the most difficult to apply and administer, both from a taxpayer and an IRS perspective.
Among other changes, the new Proposals allow significantly more flexibility on the treatment of dispositions of structural components of buildings and will be welcomed news for taxpayers who do not have records or resources to allocate the building costs in their depreciation records into all of the various building systems, a process that was required in the previous rule. Still, taxpayers would have available the election to do so if it benefits them under the new Proposed Rules.
These Regulations are generally proposed to apply to tax years beginning on or after January 1, 2014. A public hearing on the Proposals has been scheduled for December 19, 2013.
Need guidance on how the new Tangible Asset Rules will impact your company? RKL’s Tax Services Group is well-versed and ready to assist companies with these complex new Regulations. Contact your RKL tax advisor to learn more.
Contributed by Robert M. Gratalo, CPA, MST, a partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.