Impact of the Final Tangible Asset Regulations
A Mid 2015 Review of Practical Approach to
Compliance
TEI – Florida ---- May 1, 2015
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Objectives --- How to attack the fundamental components of the
new regulations for compliance –
Considerations in this review:
 Components of the rules and their overlap
 Clear understanding of past practices
 Match past practices with the components of the
new rules
 Computations and disclosures for returns
 Create new practices if needed
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Current Historical Timeline
 December 2011
-
Temporary and proposed regulations released
 March 2012
-
Transition/method change rules issued
LB&I directive issued
 November 2012
-
Notice 2012-73 issued
 December 2012
-
Technical amendments issued
 March 2013
-
LB&I Directive updated
 Sept. 13, 2013
-
Final and proposed regulations issued
• Published in Federal Register on Sept. 19, 2013
 January 2014
-
Release of first Revenue Procedure outlining new transition/method
change rules
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General framework
 Materials and supplies
 Capital expenditures in general
-
De minimis safe harbors
 Costs to acquire or produce tangible property
 Costs to improve tangible property
 Dispositions or GAAs
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Materials and supplies—definitions
 Component acquired to maintain, repair, or improve
UOP, including rotable or temporary spare parts
(rotables) and standby emergency spare parts
 Fuel, lubricants, water, etc. reasonably expected to
be consumed in ≤12 months, beginning when first
used
 UOP with economic useful life of ≤12 months,
beginning when first used or consumed
 UOP with acquisition or production cost of ≤ $200
 Identified in published guidance as materials and
supplies
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Materials and supplies—methods
 If de minimis safe harbor elected, applies to all
eligible materials and supplies except as otherwise
provided
 Incidental–deduct when purchased
 Non-incidental–deduct when used or consumed
 Concepts around “ keeping track of and recording
balances of supplies” --- how this creates or does
not create non-incidental presumption
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Materials and Supplies --- Spare Parts
 Optional method of accounting for rotables only for
pools of rotables used in same business if also
book method
-
-
If not book method, must use for all pools of rotables in
business for tax purposes
Not eligible for de minimis safe harbor
 Election to capitalize and depreciate only for
rotables or standby emergency spare parts
-
Not eligible for de minimis safe harbor
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De minimis safe harbors
 Taxpayers with Applicable Financial Statement
(AFS)
- Follow written book capitalization policy up to
$5,000 per item or invoice, as applicable, if
policy in effect and followed in AFS since
beginning of tax year
 Taxpayers without AFS
- Follow book accounting procedures policy up to
$500 per item or invoice, as applicable, if book
accounting procedures in effect and followed in
books and records since beginning of tax year
 Annual election
 Anti-abuse rule
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Costs to acquire or produce UOP
 Capitalize amounts paid to:
-
Acquire or produce UOP
Defend or perfect title to UOP
Facilitate acquisition of UOP
• Special rules for real property investigatory costs
• Simplifying convention for employee costs and
overhead
• Contingency fees included in basis of property
acquired
- No allocation to property not acquired
 Acquisition costs of property included in de minimis
safe harbor election are not capitalizable acquisition
costs
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What in the World is a “UOP”
 All the components that are functionally
interdependent comprise a single unit of property .
Components of property are functionally
interdependent if the placing in service of one
component by the taxpayer is dependent on the
placing in service of the other component by the
taxpayer. Reg §1.263(a)-3(e)(3)(i).
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Determining the UOP
 General rule—functional interdependence standard
 Special rules
-
Buildings
Leased property
• Leasehold improvements made by lessee are not
treated as UOP separate from the leased property
Plant property (industrial processes)
Network assets
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UOP within Buildings
 Although a building is defined as a unit of property for other
purposes, the determination of whether an expenditure is
deducted as a repair or capitalized as an improvement is made
by treating each of nine building "systems" as a separate unit of
property. These building systems include:
 1) Heating, ventilation, and air conditioning (HVAC) systems;
 2) Plumbing systems;
 3) Electrical systems;
 4) All escalators;
 5) All elevators;
 6) Fire-protection and alarm systems;
 7) Security systems;
 8) Gas distribution systems; and
 9) Other structural components that are specifically designated
as building systems in future published guidance (Reg.
§1.263(a)-3(e)(2)(ii)).
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Routine maintenance safe harbor
 Routine and recurring amounts paid to keep UOP in
ordinary efficient working condition do not improve
UOP
 Application to building property (including
building systems)
-
Taxpayer reasonably expects to perform activity more
than once within 10 years of the placed-in-service
date of the building or building system
 Application to non-building property
-
Taxpayer reasonably expects to perform activity more
than once during UOP’s Alternative Depreciation System
class life
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Amounts paid to improve tangible property Reg. section 1.263(a)-3
Restoration
Betterment
Adaptation
Improvement
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Betterments
 Corrects a material defect -- a material condition or
defect that either existed before the taxpayer's
acquisition of the unit of property or arose during the
production of the unit of property (whether or not the
taxpayer was aware of the condition or defect at the time
of acquisition or production);
 Is for material addition or addition of major component
to UOP
 Is “reasonably expected to” materially increase the
productivity, efficiency, strength, quality, or output of the
UOP
 No bright-line tests
-
Additional detail in examples to clarify application of rules
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Restorations
 Replaces a component deducted as loss
 Replaces a component and basis adjusted for sale or
exchange
 Repair after casualty if basis adjusted
-
Revisions to casualty loss rules
 Returns to operating condition if in state of nonfunctional
disrepair
 Rebuilds to like-new condition after end of class life
 Replaces a major component or substantial structural
part
-
Clarification of definitions of major component (function)
and substantial structural part (size)
• New definition for buildings
 Addition of salvage value exception
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Adaptations
 Adapts to a new or different use
 Three new illustrative examples added
-
Retail drugstore adds walk-in medical clinic = adaptation
Grocery store adds sushi bar ≠ adaptation
Hospital modifies emergency room to provide both emergency
care and outpatient surgery ≠ adaptation
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Election to capitalize repair and maintenance
costs—NEW
 Annual election to capitalize repair and
maintenance costs IF:
-
Incurred in carrying on a trade or business
Treated as capital expenditures in books and records
 Election applies to all repair and maintenance
amounts capitalized for book purposes
-
-
Costs treated as improvements to tangible property
• Depreciation begins when improvements placed in
service
Does not apply to repairs of rotables accounted for under
optional method
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Dispositions/GAAs
 May be applied to taxable years beginning on or after
Jan. 1, 2012, and before applicability date of final
regulations
-
Certain elections may be made for years in which the timely
filed tax return has already been filed
 Building (including structural components) is the asset
-
No GAA election necessary to forego disposition loss
 Dispositions generally only include structural
components if make annual partial disposition election
-
Required for specified transactions (sale or section 165,
168(i)(7), 1031 or 1033 transaction)
 Annual GAA election
-
Narrow definition of qualifying disposition
 Special rule for IRS adjustments to repairs
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Partial Dispositions
For purposes of the rules for dispositions of MACRS assets, a
disposition includes a disposition of a portion of an asset:
 as a result of a casualty event for which gain, determined
without regard to Code Sec. 1245 and Code Sec. 1250
 isn't recognized in whole or in part under Code Sec. 1031
(like-kind exchanges, or Code Sec. 1033 (involuntary
conversions,
 in a transfer of a portion of an asset in a transaction described
in Code Sec. 168(i)(7)(B) (certain transactions involving
corporations or partnerships),
 in a sale of a portion of an asset;
 in a disposition, other than one listed above, of a portion of an
asset if the taxpayer makes an election to treat the disposition
of the disposed portion as a disposition.
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