Businesses must comply with the rules contained within the final regulations for tax years beginning on or after January 1, 2014. The wide-reaching scope of these regulations will impact real and personal property of the vast majority of businesses and create unique planning opportunities as well as pitfalls. The key to a successful implementation of the final regulations will be to start the planning process prior to the January 1, 2014 effective date.

Fixed asset capitalization policies and the expensing of certain costs can have an adverse impact on property tax reporting and may raise audit concerns. A comprehensive understanding of both the regulations and the company’s policies will allow for effective planning, a smooth transition, and maximization of tax savings opportunities.

All taxpayers who incur expenditures to acquire, produce, or improve tangible property will be impacted by the final tangible property regulations. Though taxpayers have until January 1, 2014 to become compliant with these regulations, many taxpayers are considering the advantages of adopting certain provisions of these regulations at an earlier date. At a taxpayer’s discretion, the final regulations, or the former temporary regulations, may be implemented retroactively as early as January 1, 2012. Tax savings and planning opportunities exist for certain taxpayers to adopt these procedures earlier than required, by amending prior year tax returns to take advantage of elections provided in the final regulations. The IRS will be issuing “transition guidance” to assist taxpayers who have elected to apply the regulations for years prior to 2014.

Even if taxpayers wait until January 1, 2014 to comply with the final regulations, planning should take place prior to the start of 2014. All taxpayers affected by the regulations should review their current accounting methods to determine if they are in compliance with the final regulations. It will be advantageous for taxpayers to have a complete understanding of current policies and to ensure that certain procedures are in place prior to implementation.

The following main areas were impacted as a result of the issuance of the final regulations:

· Materials and Supplies (Reg. 1.162-3);

· Repairs and Maintenance (Reg. 1.162-4);

· Capital Expenditures (Reg. 1.263(a)-1);

· Amounts paid for the acquisition or production of tangible property (Reg. 1.263(a)-2); and

· Amounts paid for the improvement of tangible property (Reg. 1.263(a)-3).

While the final regulations incorporate many elements of prior law, they also include new standards that manufacturers should carefully consider, including:

· A simplified “de minimis” safe harbor, permitting a tax deduction for expenditures of up to $5000 per item, so long as the taxpayer consistently applies a written policy under which such amounts are expensed for book purposes as well. This written policy must be in place as of the first day of the tax year. The regulations simplify the deductibility of bulk purchases, as well as the treatment of transaction costs, such as delivery and installation fees. The $5000 per item limit is only a safe harbor, and does not preclude deductions for larger amounts either under an agreement with the taxpayer’s IRS examination team, or if the taxpayer can show that deducting larger amounts is otherwise permissible.

· A new “book conformity” capitalization safe harbor, allowing taxpayers to capitalize for tax purposes all repair and maintenance costs capitalized for book purposes. Taxpayers, including those making this election, however, should review their repair and maintenance costs expensed for book purposes, because those costs will be ineligible for the safe harbor.

· A special definition of “unit of property” for plant property, such as manufacturing, warehousing, and distribution equipment. Many manufacturers find that properly applying this fact-intensive standard is one of the most critical – and time consuming – steps in implementing the new regulations.

· A “routine maintenance safe harbor” that may significantly expand a manufacturer’s ability to currently deduct many of the more common (and expensive) cyclical maintenance costs.

· A narrowing of the election to capitalize and depreciate materials and supplies. Under the final regulations, that option is available only for rotable, temporary, or emergency stand-by spares — all others not treated as “de minimis” costs must be accounted for when used (if “non-incidental”) or when purchased, subject to capitalization if expected to be used in an improvement activity.

In addition to these new standards and safe harbors, the final regulations provide numerous additional or revised examples demonstrating the rules for identifying the taxpayer’s units of property and major components, and for distinguishing deductible repairs from capital improvements. Correctly applying these complex and fact-intensive standards is critical in determining that the taxpayer complies with and fully benefits from these important new regulations.

Silver Oak Advisors’ founders bring over 40 years of Big 4 and Industry property tax experience. Silver Oak is based in Atlanta and was formed to provide taxpayers in need of property tax assistance, former Big 4 and industry experienced professionals with specific industry and/or property expertise in addition to working knowledge and relationships with the specific taxing jurisdictions.

Contact us for a no-cost/no-obligation review of your real and personal property assessments. Silver Oak Advisors does not utilize staff in these areas. These no-cost/no-obligation reviews are handled by our Directors. We believe you deserve 40 years of Big 4 and industry experience in Complex and Industrial properties and a history of results.

Brian T Scully, CMI


Silver Oak Advisors, LLC

2700 Cumberland Pkwy NEW LOCATION
Suite 525
Atlanta, Georgia 30339

Toll-Free (877) 352-8616 x701

Direct (678) 403-2084

Mobile (678) 848-2893

eFax (404) 506-9266


Bio and References