taxAlthough there are minor changes in tax law each year that only affect some taxpayers, every once in a while, a sweeping change that affects everyone comes along. The new regulations on tangible property, effective for tax years beginning on or after January 1, 2014, is an example of one of these rare, sweeping changes.

What are Tangible Property Regulations, otherwise known as "TPRs"?

The new tangible property regulations aim to simplify and clarify the rules regarding materials and supplies, repairs and maintenance, acquisition of property, improvements to property, and disposition of assets.

How do the TPRs apply to me?

Part of complying with the TPRs is knowing what you’ve done in the past.  Although there may be aspects of the new rules that remain constant, essentially all taxpayers will have to make some changes to comply with the new accounting methods.

At minimum, your capitalization policy should be updated to comply with the required rules, as well as incorporate any of the optional methods or annual elections that may be beneficial. Most taxpayers will need to file at least one Form 3115 for the 2014 tax year. In addition to this, taxpayers may potentially need to include a “481(a) adjustment” in taxable income that catches up their depreciation schedule to the new rules (what should have been capitalized, but wasn’t, and vice versa).

The required accounting methods under the TPRs include the following:

  • Definition of a “unit of property” to which expenditures are compared to determine whether they should be capitalized or may be deducted.
  • Definition of “materials and supplies”, including distinctions for incidental and non-incidental materials and supplies, and types of spare parts.
  • De minimis safe harbor to deduct expenditures up to $500 (or up to $5,000 if a taxpayer has an “applicable financial statement”).
  • Safe harbor for routine maintenance.
  • Clarification of what constitutions an “improvement” to property, with definitions of betterments, adaptions, and restorations.
  • Safe harbor for “small taxpayers” to deduct certain expenses without applying the detailed rules to distinguish between repairs, maintenance, and improvements.
  • Allowing partial dispositions of assets, and rules for identifying the basis of the disposed portion of an asset.

While in many instances the TPRs move away from “facts and circumstance” determinations, and towards more objective guidelines and bright-line tests, they still remain a complex area of tax law. Inevitably, adopting the new rules will require a time investment for you and your CPA. However, the good news is that in many cases the new regulations will be taxpayer friendly.  Additionally, our team has been working to streamline the accounting method change process, to make the changes as seamless as possible. As a result, we're here as a resource, to help you navigate the application of the new rules to your business.

Still curious to learn more about the new TPR rules? Our team at Delap is happy to answer any questions regarding this concept, or any other accounting and finance challenges you may be facing.

Reach out today!

Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms, located in Lake Oswego, Oregon.