Repair Regulations Update: Taking Stock after September 15th
Efforts to implement and manage the significant changes arising from the final tangible property repair regulations go far beyond the deadline and include several key areas to focus on.
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 affect businesses in decades. And while compliance is required starting with the 2014 tax year, the efforts to implement and manage the changes go far beyond the recent deadline of September 15th – the last opportunity for companies to file for method changes for tax year 2014.
In fact, according to Joseph Brown, national managing partner with Strategic Federal Tax Services at Grant Thornton LLP, now is the optimal time for a thorough review of how you’ve implemented the tax changes thus far. He suggests several key areas you should focus on in preparation for 2016 and beyond:
Review policies, procedures, and documentation: Now is the time to make sure that your tax policies have been revised accordingly and are being followed correctly, with the documentation to prove it. For instance, you may need to revise or create appropriate invoicing policies that reflect your corporate decisions for the repair regulations.
At the same time, consider any taxpayer-advantageous opportunities (e.g., de minimis election) when revising your policies and methods. There is also another benefit: accurately documenting your policies and procedures enables your financial auditors to sign off that your tax position agrees with the rules.
Evaluate your de minimis policy: Among the more welcome changes adopted in the final tangible property repair regulations is the de minimis rule related to the acquisition or production of property. This rule provides for a safe harbor applied at the invoice or item level, based on the policies used by a taxpayer for its financial accounting books and records.
Carefully review your policy threshold for de minimis compliance. Analyze invoice amounts to see what is typical for your company. This information is important for two reasons: 1) as input to revise your policies appropriately for the safe harbor amount, and 2) to help you proactively plan to increase the capitalization threshold beyond the safe harbor. Based on typical invoice amounts, you could estimate the dollar amount of assets that could be expensed if you used a higher expense limit and determined the most advantageous policy for your company.
Assess the applicability of the Industry Issue Resolution (IIR): Has there been an IIR issued for your industry? IIRs can help simplify the compliance process, so it’s important to re-evaluate policy and compliance measures based on the guidance in the IIR to determine the impact and potential opportunities for your business. For instance, the IRS released Revenue Procedure 2015-2 in January of this year which provides clarification of several safe harbor methods of accounting for certain property costs paid or incurred by cable system operators. If you’re in the retail industry, keep your eyes open for an anticipated IIR regarding capitalization versus repair issues, specific to retail businesses.
Prepare for an audit: “We know that the repair regulations will be a major part of audits that happen in the next audit cycle,” says Brown. “Now is the time to prepare for how you will demonstrate repair regulation compliance in an audit situation.” Creation of an audit package can help expedite acceptance by the IRS, as well as the financial auditor’s assessment of controls and your ASC 740-10 liability. Finally, if your systems don’t already support an audit trail, you should consider implementing a new solution that provides a comprehensive audit trail. Easing the complexity of compliance: As you take stock of the areas above, it may also be a good time to re-evaluate the software you are using to support your policies and procedures for complying with the repair regulations. Here are some areas to think about:
- Does your fixed assets system automate as much as possible of the repair process?
- Does it enforce policies?
- Does it help ensure accuracy and provide a strong audit defense?
If you can’t answer yes to the above questions, it may be a good time to consider moving to a more robust fixed assets system, such as BNA Fixed Assets™. BNA Fixed Assets gives you the functionality you need to efficiently and accurately manage and automate repair processes.
Find out more about compliance with repair regulations and how Bloomberg Tax Fixed Assets can streamline the process by accessing the white paper Are You Complying with the Unit of Property Rules in the Tangible Property Regulations?Access White Paper
Learn how the unit of property rules impact risk management and tax strategies and how you can best reduce exposure and tax liability while ensuring compliance.