Repair Regulations Update: Preparing for 2016 and Beyond
Achieving compliance with the new repair regulation mandates is no easy feat. Companies are seriously looking at addressing the misalignment.
Just two short years ago, the IRS issued the final tangible property repair regulations, which represented some of the most significant tax law changes to tangible property in decades. And while the deadline for the 2014 tax year has come to a close, the efforts to implement and manage repair regulations best practices should not stop. For many companies, now is the opportune time to streamline the repair regulations function for 2016 and beyond.
Tangible Repair Regulations at a Glance
Ten years in the making, the final legislation, officially released in September 2013, significantly overhauled the way companies deducted repairs and maintenance of tangible property. While there were some safe harbor elections that made businesses with less than $10 million in revenue exempt, virtually every business was impacted.
With detailed and clear guidance now available, corporations essentially had to review policies and internal processes to ensure compliance with repair regulation changes. In addition, the regulations created the need for new documentation for audit purposes. In other words, achieving compliance with the new mandates was no easy feat.
Year One Lessons Learned
With the majority of corporations on a calendar year, the release of the repair regulations guidance in September 2013 (with an effective date of January 1, 2014) gave companies roughly four months to analyze and implement the new regulations into their internal processes, procedures, and operational systems. Under tight time constraints, most companies had no choice but to rely on existing, cobbled-together systems comprised mostly of ERP and general ledger software, and, of course, spreadsheets. However, these systems had their limitations such as:
- Inability to make changes or fix errors without IT assistance
- Inability to manually reconcile created reports with tax data and financial statements, including the balance sheet
- Inaccurate audit trails due to inability to make and track changes correctly
- Reports that were not easily customizable and didn’t suit the needs of the company
- Difficulty in maintaining documentation, in light of ongoing regulation changes, such as Sarbanes-Oxley and the final tangible property regulations
In addition to some of the limitations listed above, spreadsheets had their own unique set of issues, including vulnerability to human error and lack of scalability.
For many companies, compliance with the final repair regulations equated to a painful, manual process of analyzing thousands of fixed assets transactions. The regulations also revealed just how inadequate current systems were at addressing the complexities inherent in calculating repairs and maintenance deductions.
But, in the interest of time, the goal for the 2014 tax year was to achieve compliance with the regulatory changes, however possible. For the majority, that typically meant a manual review and update of internal processes, procedures, and operational systems, or simply conforming to the accounting books method. In fact, a recent poll conducted during a Web seminar of 100 tax and finance executives revealed that over 33 percent of the respondents used manual processes to comply with the 2014 repair regulations changes.
Based on market research, and feedback from Bloomberg Tax customers and partners, year one of the repair regulations was all about compliance, but year two and beyond are about creating efficiencies through automation technology. Now that the frenzy of the first year of compliance is over, companies are looking to address the misalignment between the systems in place and the new requirements of the repair regulations mandates. This misalignment can be mitigated by technologies that automate the processes required to align a company’s accounting systems and chart of accounts with the unit of property (UOP) that is required under the repair regulations. Another way for companies to realize efficiency gains is to align the systems used to capitalize depreciation with the process used to comply with the tangible regulations. Whichever way you apply automation technology, the overall goal is to reduce the burden of managing repair and maintenance deductions by:
- Identifying the most beneficial tax treatment under the final regulations, considering industry-specific guidance
- Uncovering tax savings in the form of immediate deductions for qualified repair and maintenance expenses, and accelerated deductions
- Providing confidence that repair and maintenance calculations are accurate
- Shortening closing times
- Providing 24/7 access to repair regulations data with the ability to run customized reports on the fly
- Providing a holistic view of all repairs related to major assets
Beyond the major changes implemented beginning in 2014, for some industries those changes were just the tip of the iceberg. In the past few months, industry-specific guidance has also been released. For example, the IRS issued guidance for cable companies in September 2015 and most recently, for the retail industry in November 2015. This means that companies in those industries will need a way to add industry-specific domain changes to their processes, making automation even more critical in their quest to remain in compliance.
For financial executives, compliance with the final repair regulations has brought to light the potential for tremendous tax savings within the repair and maintenance deductions function. As a result, progressive companies are now seeking out and implementing best-of-breed automation technologies, such as Fixed Assets, from Bloomberg Tax to manage their complete tangible property lifecycle — including repairs and maintenance. The result is a transformation of the repairs and maintenance deduction processes as a strategic part of the tangible property lifecycle.