Tangible Assets' New Tax Rules: Beware Of 4 Changes That Can Impact Businesses
Late last year, the IRS released a new set of temporary regulations on tangible asset costs that will likely affect most businesses, especially manufacturers and distributors. With permanent regulations still under debate, these temporary rules apply to tax years starting Jan. 1, 2012, and to any amounts paid or incurred in this and upcoming years. These rules affect any business that acquires, produces or improves tangible property. Here are four of the most notable changes.
De Minimis Rule: Many businesses are aware that the de minimus rule can offer an exemption from capitalizing amounts paid to acquire or produce a unit of property. But businesses must also be aware that the threshold that will trigger this rule has changed under the new regulations.
For de minimus to apply, a tax-paying business must have a written capitalization threshold at the beginning of the taxable year that is treated as an expense on financial statements. The expense must be less than or equal to 0.1 percent of gross receipts for federal income taxes, or 2 percent of the taxpayer's depreciation or amortization expense. This is less than what many taxpayers have traditionally deducted, and may require revisions of old accounting procedures.
Materials & Supplies: Acquisitions not deductible under de minimis may be deductible as materials and supplies or as rotable and temporary spare parts. But businesses should note that thresholds for some of these exemptions have also changed. For materials and supplies, the threshold covers tangible property that is economically useful to the taxpayer for up to 12 months, or that has an acquisition or production cost of $100 or less. The $100 ceiling strikes many taxpayers as lower than what they may be used to.
Improvements: Generally, improvements to a unit of property must be capitalized. However, what constitutes "units of property" has changed under the temporary regulations, a change that may result in fewer deductions.
Under the temporary regulations, a "unit of property" refers not only to a building structure itself, but to systems within the building, such as HVAC, plumbing, electrical, elevators, escalators, fire protection and alarms, security and gas distribution systems. With these systems being considered their own units, they must be capitalized, whereas they may have previously qualified as deductible repairs.
Routine Maintenance: The temporary regulations provide a routine maintenance "safe harbor" as an exception to capitalization. This applies to amounts paid for recurring activities performed as a result of using the property. Such activities may include inspection, cleaning and testing of the unit of property, and the replacement of parts with parts that are comparable, commercially available and reasonable.
These temporary regulations are just a few of the new rules likely to affect many businesses. For many, updating accounting procedures will be important. It is, of course, recommended that you contact a tax professional to guide you in complying with these new regulations.
Crystal A. Germanese is a tax manager at BlumShapiro, a tax and business consulting firm with offices in Massachusetts and Connecticut.
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