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Update On The Implementation Of The Tangible Property Regulations (Repair Regulations)

12/09/2014

You may recall that in 2013 the IRS issued extensive tangible property capitalization regulations (also referred to as the “repair regulations”).  These regulations impact most business taxpayers, including owners of real estate.  Taxpayers are required to change their accounting methods used for federal income tax purposes to comply with the new regulations for tax years beginning on or after January 1, 2014.

The IRS issued detailed guidance with respect to the accounting method changes required by the new regulations, including procedures for reporting the required changes to the IRS.

In our “Executive Summary of the New Tangible Property Regulations,” we describe two phases of implementing the new regulations as follows:

Phase 1 - Since the new regulations are effective for tax years beginning on or after January 1, 2014, taxpayers have to decide how they will deal with the changes going forward.  Many taxpayers have already changed their accounting methods used for book and financial statement purposes to comply with the new rules in order to eliminate having fixed asset book and tax differences going forward.  Some taxpayers have decided not to change their accounting methods used for book and financial statement purposes, and will deal with book and tax differences going forward.  If this Phase 1 issue has not yet been addressed, you may want to give it immediate attention.

Phase 2 – Even though the changes to comply with the new regulations are mandatory, taxpayers are required to report the changes to the IRS on one or more IRS forms 3115.  As discussed in our Executive Summary, most of the changes in accounting methods are retroactive.  Many will require calculations of “481(a)” adjustments determined as of the beginning of the year of change (i.e. January 1, 2014 for calendar year taxpayers).  Some of these 481(a) adjustments will be favorable to taxpayers and some may not be.  In some situations involving real estate, cost segregation studies may be desirable.  In many cases, the effort to implement these changes (i.e. Phase 2) will be significant.

Due to time restraints our industry faces during the time period from January 1 to April 15, our desire is to assist clients with these issues, including preparing any IRS forms 3115 and calculation of any required 481(a) adjustments prior to December 31, 2014. We certainly do not want these issues to hold up the preparation of tax returns.  

We will be pleased to assist you with implementing these rules and answer any questions you have.  Please contact us at your convenience in order to get the process initiated.

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