Final Tangible Property Repair Regulations Offer Tax Savings Opportunities
An insider's view of key considerations essential to implementing asset repair rules
With the adoption of the new IRS tangible property repair rules, identifying and properly accounting for units of property has become a central issue for all corporate taxpayers, even those companies that in the past were not historically capital intensive.
A company's units of property are determined by applying the functional interdependence standard. Components of a unit of property are treated separately if the component uses a different Modified Accelerated Cost Recovery System (MACRS) class than the main unit of property, or if the component has historically been depreciated using a different accounting method. While buildings and structural components have typically been treated as a single unit of property, the new regulations list eight different structural components that must be viewed as separate units of property.
"The definition and application of unit of property to your situation is key to properly applying the rules, and may present some opportunities for benefits," said Larry Martin, a senior tax executive and former Chief of Tax for AOL, Inc.
Key considerations include materials and supplies, de minimis safe harbor, dispositions and partial dispositions, as well as betterments and restorations. Once you have determined how unit of property is going to be applied within your company, you need to be certain that your criteria are being applied consistently across the board to manage risk.
"When I talk to clients who have gone through this analysis, what I have heard consistently is that the ideal unit of property for tax purposes is most likely different from what's currently being used for book purposes," said Dean Sonderegger, Executive Director of Product Management at Bloomberg BNA, Software Segment.
Repairing this data often requires tax department personnel to communicate with their colleagues in information technology or enterprise software management to find ways to automate the process of implementing changes. "There is a lot of potential value you can bring to your company by having fixed assets systems aligned with your policies and practices in order to achieve the optimal results," said Martin. "You don't want to have to keep doing this year in and year out by hand."
Are Your Fixed Asset Systems Up to the Challenge?
Before corporate taxpayers implement changes to accommodate these new repair rules, they may want to first determine whether their fixed assets systems can meet the new challenges involved in supporting data repair processing.
"Tax managers need to think about how manual of a process it's going to be for their already-stretched tax departments to provide this type of analysis in support of the annual return," says Sonderegger.
Sonderegger suggests a detailed asset repair methodology for corporate taxpayers that include the following steps:
- Clean Existing Fixed Assets Data
- Remove assets no longer in service (perform physical inventory if significant issues exist).
- Review sub ledger for correct depreciation policy/treatment for existing assets.
- Split existing assets to reflect proper unit of property and value information where appropriate.
- Build Repair Import Process
- Develop mechanisms to identify repairs — account codes, check box in Accounts Payable, etc.
- Build import/export process from Accounts Payable into the Fixed Assets sub ledger. Automate if possible.
- Implement Audit Trail Tracking
- Ensure that facts/circumstances are documented as part of the repair record.
- Include copy of Accounts Payable invoice, additional notes, use, date, and time stamp for all actions.
- Implement Repair Processing
- Develop processes to dispose of converted portions of unit of property as appropriate (may be book specific).
- Develop processes to capitalize new repairs and apply fact patterns of the parent asset.
- Develop processes to ensure repairs are disposed and transferred with parent asset.
To learn more about opportunities to increase efficiency, save on taxes, and reduce audit risk, watch a recording of our recent webinar, The Final Repair Regulations: Top Tax challenges & Savings Opportunities.View Webinar
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