Tangible Property FAQ Puts Complex Rules Into ‘Layman's Terms'
The IRS has put some of the tangible property rules into language that small-business taxpayers can understand, practitioners told Bloomberg t.
“It thankfully puts it all in layman's terms,” David Lichtenstein, principal at Sansiveri Kimball & Co. in Providence, R.I., said March 9. “As a result, this FAQ is a valuable resource to the average business taxpayer.”
The Internal Revenue Service released answers to some frequently asked questions March 4 that clarify capitalizing expenses that exceed de minimis safe harbor limits, characterizing a deductible repair versus a capital improvement and alternative methods for small businesses under tax code Section 162.
The IRS has been seeking to ensure that businesses understand how to comply with the final regulations (T.D. 9636) that took effect for tax year 2014. The regulations overhauled how to deduct and capitalize expenses.
Andrew Keyso, IRS associate chief counsel (Income Tax and Accounting) said March 6 that the agency was concerned that many small taxpayers don't have tax counsel who completely understand the rules (45 DTR G-3, 3/9/15).
“It's not like everything has been vetted,” Christian Wood, a principal at McGladrey LLP's Washington National Tax Office, said March 9. “Some of the small practitioners have taken a very conservative approach, which is causing some confusion.”
The IRS granted businesses with less than $10 million in assets relief on a prospective basis from filing a change in accounting method form in February, which practitioners widely approved (31 DTR G-7, 2/17/15).
“This is their attempt to say, ‘Listen, people. Here is how to apply it. We're going to boil it down as simply as we can,' ” Wood said. “They're trying to account for as many scenarios as possible.”
The FAQ didn't address how a business determines if it is under the $10 million threshold, but an IRS official said March 6 that the limit was intended to mirror how a company presents itself as a small business on Form 1120, U.S. Corporation Income Tax Return.
Material and Supply Rules
Sharon Kay, a partner in Grant Thornton LLP's Washington National Tax Office, said March 9 that clarifications about material and supply rules, which determine how to write off and deduct some items, oversimplify what the regulations say.
“If you were previously in compliance with the rules you generally will still be in compliance and generally no action will be required to continue to apply these rules on a prospective basis,” the IRS said in the FAQ.
The regulations are largely based on prior law, but the new rules outline new timetables for deducting rotable spare parts, Kay said. The rules also include a $200 limit for items defined as materials and supplies, which might not conform with how businesses were previously operating. Items that were previously written off may now have to be depreciated.
“You could have a book/tax difference,” Kay said.
The rules clarified that businesses that elect to use the de minimis safe harbor for deducting expenses aren't obligated to capitalize everything that exceeds the $500 threshold for qualifying small businesses and $5,000 for larger ones.
“The IRS has gone on an evolution,” Wood said. “When it first came out, it said the de minimis was an absolute threshold.”
Taxpayers can justify using different dollar amounts if they can justify it to the IRS, Wood said.
“They did a nice job of answering the questions for taxpayers with less than $10 million in total assets,” Kay said. “That covers all sorts of forms: C corps., S corps., partnerships, individuals with a Schedule C or Schedule E.”
The FAQ didn't clarify any part of the disposition regulations, Kay said. On the repair side, something could be treated as one asset, but on the disposition side it could be separate assets.
For example, replacing an original heating, ventilation and air conditioning (HVAC) unit in a building with a single system could be considered an improvement, and the taxpayer could make a partial disposition. Once it is replaced again, taxpayers must dispose of the last one and capitalize the new one.
“The interactions of how these things work can get very complex,” Kay said. “If you haven't been steeped in them for a very long time, subtle interactions are easy to be missed.”
Kay, who was a Treasury Department employee until 2008, worked with a team that drafted the proposed tangible property regulations.
“It would be nice if the disposition could make their way into an FAQ,” Kay said. “The procedural rules are quite involved.”
To contact the reporter on this story: Laura Davison in Washington at lDavison@bloombergtax.com
To contact the editor responsible for this story: Cheryl Saenz at firstname.lastname@example.org
This update can be found in the Bloomberg Tax's flagship daily news service, Daily Tax Report®, March 10, 2015. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the Daily Tax Report today. Learn more »