Managing the Operational Challenges of the Tangible Property Regulations

The March 15 and April 15 tax filing deadlines are behind us.  Many individuals and entities have filed their income tax returns on a timely basis.  Others have filed for an extension of time to complete their applicable income tax returns.  Either way, most taxpayers need to determine how to deal with the new Tangible Property Regulations starting with 2014.  Decisions made with the 2014 tax returns will have an impact on 2015 and future years.

Implemented properly, these new taxpayer friendly regulations can increase cash flow, reduce taxable income, lower quarterly estimated tax payments, potentially recover prior year taxes paid, and provide audit protection for prior years.  The effect can be felt at the state as well as federal level.

Some key changes to consider:

  1. Several new elections can be made, including the de minimis safe harbor to deduct up to $500 of new expenditures.
  2. New criteria to establish whether an improvement should be capitalized or expensed.
  3. Ability to write-off the remaining balance of a prior year abandoned asset not previously written off.
  4. A safe harbor to allow tax payers to deduct the cost of routine maintenance.
  5. Ability to treat a partial disposition of an asset as a complete disposition with recovery of basis.
  6. Decision whether to use the simplified provisions in revenue procedure 2015-2020.

For those clients that have financial statements prepared and have financial covenants related to bank loans, they will want to make sure their financial covenants are not negatively impacted.  To this extent, we present the financial statement expense due to the new regulations in a manner acceptable to the loan officers.  The banks understanding and acceptance of this presentation pave the way for complete utilization of this important tax reform act.

Companies enter into equipment and property purchases every day.  Some of these purchases can bring unique accounting and tax implications and challenges.  Applying the new cost recovery rules can be onerous.  It’s nearly half way through 2015, and your company may have already made purchases of equipment or real property.  Question, are your bookkeepers accounting for the new purchases in the same way as in the past?  It is important to account for new purchases using the new cost recovery methods.  This will allow for better tax planning and re-consideration of estimated taxes as we go through the year.

Conversely, if your company expensed a majority of your 2014 purchases to lower the 2014 tax, then the 2015 estimated taxes might be artificially artificially low resulting in an amount due when you file the 2015 income tax returns.  You will want to know that now rather than be surprised next Spring.

Attending to the new cost recovery procedures can have positive tax results if properly implemented.  Our professionals have extensive experience with private companies focusing in part on the acquisition of equipment and real estate.  Working with our clients throughout the year ensures the proper accounting and tax reporting for all new purchases are reflected appropriately for financial and tax reporting purposes.

Please contact Tony Anchukaitis if you want to increase your cash flow using the new rules on tangible property practices.