April 15, 2015, may seem a long way away, but business taxpayers are facing a tax-related decision that would be better made now, long before next spring’s deadline.
The issue relates to new IRS regulations on how to classify certain kinds of expenditures – as either capital outlays or as expenses deductible for tax purposes in the current year. The regulations attempt to address what was seen as a lack of clarity in previous regulations.
The new regulations are more than 200 pages long – compared with four pages in the previous version – and reach a level of detail far beyond the scope of this blog post. The regulations cover issues like the tax treatment of amounts paid to improve tangible property, the treatment of the costs of acquiring property, accounting for materials and supplies, improvements to leased property, disposition of property and a safe harbor deduction for the cost of acquiring tangible property, and materials and supplies, among other topics.
The key decision for businesses is not if, but how they are going to change their accounting methods to comply with the new regulations. Accounting methods for federal income tax purposes must be changed to comply with the new regulations for tax years beginning on or after Jan. 1, 2014.
Since most of the accounting changes will be retroactive to that tax year start date, businesses would be well-advised to go ahead and make a decision about how to handle the issue. A conversation with your accounting adviser is a good place to start.
Steven Dodson is a CPA with LBMC Partner Tax Services in Nashville. He can be reached at (615) 309-2223 or firstname.lastname@example.org.