The newly issued repair regulations seem to be all the buzz… After much anticipation, new tangible property regulations were released, replacing both the proposed regulations (issued March of 2008) and the long-standing current regulations. These new temporary regulations, effective for taxable years beginning on or after January 1, 2012, update the prior rules and serve to codify a previously unclear area of tax law.
It is noteworthy that the new temporary regulations include rules that are significantly different from both the current regulations and the proposed regulations. Additionally, a surprise was included within these new rules; the regulations not only provided the expected guidance on amounts paid to acquire or produce tangible property, but they also offer unanticipated new guidance regarding the disposition of real property. There are 19 new automatic accounting method changes contained in the Revenue Procedures providing guidance on these rules (Revenue Procedures 2012-19 and 2012-20).
Of these 19, there are 4 or 5 that almost all taxpayers will want to consider. These relate to depreciation changes, dispositions, the general asset category, capitalization of items which were previously deducted, and the de minimis rule. Here are some of the headlines from the regulations.
- Unit of Property Teams Up With Building Systems/Components. The unit of property is still the building, but now you analyze betterments based upon building systems including HVAC, plumbing, electrical, building sub systems, and major building and structural components.
- Dispositions Come Out Of Nowhere. For tax years beginning on or after January 1, 2012, a loss on disposition MUST be calculated and recognized upon the removal of each and every building component from a building. This is burdensome in that almost nobody maintains this level of documentation. In addition, the restoration rules require the capitalization of any replacement to an item on which a loss on disposition is taken. Pay very close attention to the General Asset Election!
- General Asset Election Saves The Day. The IRS has given taxpayers 2 years to file a retroactive late general asset account election. By placing assets into general asset accounts, the “MUST” rule of dispositions turns into a “MAY” option. With this flexibility, you can now determine when items meet the repairs standard and therefore become deductible. However, if capitalization is required, you can now determine if you will compute a loss on disposition for a particular renovation/improvement.
- Doing Nothing Is Doing Something. If you do not address these rules, you will have in effect chosen to be subject to disposition calculations on the removal of all building components in 2014 and beyond ( for calendar year taxpayers). The first time you do this, a dispositions method change will be required. In addition, that will potentially trigger an unfavorable repairs method change. Remember, you can’t take dispositions and repairs on the same tax return unless you made the retroactive general asset account method change. In 2014, if you did nothing, you have lost the ability to file for this automatic change, so if you do nothing, you have done something!
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