2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. 2012 McGladrey LLP. All Rights Reserved. 2013
McGladrey LLP. All Rights Reserved. TEI Florida ---- May 1, 2015
Impact of the Final Tangible Asset Regulations A Mid 2015 Review of
Practical Approach to Compliance
Slide 2
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Objectives ---- How to attack the fundamental
components of the new regulations for compliance Considerations in
this review: Components of the rules and their overlap Clear
understanding of past practices Match past practices with the
components of the new rules Computations and disclosures for
returns Create new practices if needed 1
Slide 3
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Current Historical Timeline December 2011 -
Temporary and proposed regulations released March 2012 -
Transition/method change rules issued - LB&I directive issued
November 2012 - Notice 2012-73 issued December 2012 - Technical
amendments issued March 2013 - LB&I Directive updated Sept. 13,
2013 - Final and proposed regulations issued Published in Federal
Register on Sept. 19, 2013 January 2014 - Release of first Revenue
Procedure outlining new transition/method change rules 2
Slide 4
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. General framework Materials and supplies
Capital expenditures in general - De minimis safe harbors Costs to
acquire or produce tangible property Costs to improve tangible
property Dispositions or GAAs 3
Slide 5
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Materials and suppliesdefinitions Component
acquired to maintain, repair, or improve UOP, including rotable or
temporary spare parts (rotables) and standby emergency spare parts
Fuel, lubricants, water, etc. reasonably expected to be consumed in
12 months, beginning when first used UOP with economic useful life
of 12 months, beginning when first used or consumed UOP with
acquisition or production cost of $200 Identified in published
guidance as materials and supplies 4
Slide 6
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Materials and suppliesmethods If de minimis
safe harbor elected, applies to all eligible materials and supplies
except as otherwise provided Incidentaldeduct when purchased
Non-incidentaldeduct when used or consumed Concepts around keeping
track of and recording balances of supplies --- how this creates or
does not create non-incidental presumption 5
Slide 7
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Materials and Supplies --- Spare Parts
Optional method of accounting for rotables only for pools of
rotables used in same business if also book method - If not book
method, must use for all pools of rotables in business for tax
purposes - Not eligible for de minimis safe harbor Election to
capitalize and depreciate only for rotables or standby emergency
spare parts - Not eligible for de minimis safe harbor 6
Slide 8
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. De minimis safe harbors Taxpayers with
Applicable Financial Statement (AFS) - Follow written book
capitalization policy up to $5,000 per item or invoice, as
applicable, if policy in effect and followed in AFS since beginning
of tax year Taxpayers without AFS - Follow book accounting
procedures policy up to $500 per item or invoice, as applicable, if
book accounting procedures in effect and followed in books and
records since beginning of tax year Annual election Anti-abuse rule
7
Slide 9
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Costs to acquire or produce UOP Capitalize
amounts paid to: - Acquire or produce UOP - Defend or perfect title
to UOP - Facilitate acquisition of UOP Special rules for real
property investigatory costs Simplifying convention for employee
costs and overhead Contingency fees included in basis of property
acquired - No allocation to property not acquired Acquisition costs
of property included in de minimis safe harbor election are not
capitalizable acquisition costs 8
Slide 10
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. What in the World is a UOP All the components
that are functionally interdependent comprise a single unit of
property. Components of property are functionally interdependent if
the placing in service of one component by the taxpayer is
dependent on the placing in service of the other component by the
taxpayer. Reg 1.263(a)-3(e)(3)(i). 9
Slide 11
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Determining the UOP General rulefunctional
interdependence standard Special rules - Buildings - Leased
property Leasehold improvements made by lessee are not treated as
UOP separate from the leased property - Plant property (industrial
processes) - Network assets 10
Slide 12
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. UOP within Buildings Although a building is
defined as a unit of property for other purposes, the determination
of whether an expenditure is deducted as a repair or capitalized as
an improvement is made by treating each of nine building "systems"
as a separate unit of property. These building systems include: 1)
Heating, ventilation, and air conditioning (HVAC) systems; 2)
Plumbing systems; 3) Electrical systems; 4) All escalators; 5) All
elevators; 6) Fire-protection and alarm systems; 7) Security
systems; 8) Gas distribution systems; and 9) Other structural
components that are specifically designated as building systems in
future published guidance (Reg. 1.263(a)-3(e)(2)(ii)). 11
Slide 13
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Routine maintenance safe harbor Routine and
recurring amounts paid to keep UOP in ordinary efficient working
condition do not improve UOP Application to building property
(including building systems) - Taxpayer reasonably expects to
perform activity more than once within 10 years of the
placed-in-service date of the building or building system
Application to non-building property - Taxpayer reasonably expects
to perform activity more than once during UOPs Alternative
Depreciation System class life 12
Slide 14
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Amounts paid to improve tangible property -
Reg. section 1.263(a)-3 Improvement BettermentRestorationAdaptation
13
Slide 15
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Betterments Corrects a material defect -- a
material condition or defect that either existed before the
taxpayer's acquisition of the unit of property or arose during the
production of the unit of property (whether or not the taxpayer was
aware of the condition or defect at the time of acquisition or
production); Is for material addition or addition of major
component to UOP Is reasonably expected to materially increase the
productivity, efficiency, strength, quality, or output of the UOP
No bright-line tests - Additional detail in examples to clarify
application of rules 14
Slide 16
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Restorations Replaces a component deducted as
loss Replaces a component and basis adjusted for sale or exchange
Repair after casualty if basis adjusted - Revisions to casualty
loss rules Returns to operating condition if in state of
nonfunctional disrepair Rebuilds to like-new condition after end of
class life Replaces a major component or substantial structural
part - Clarification of definitions of major component (function)
and substantial structural part (size) New definition for buildings
Addition of salvage value exception 15
Slide 17
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Adaptations Adapts to a new or different use
Three new illustrative examples added - Retail drugstore adds
walk-in medical clinic = adaptation - Grocery store adds sushi bar
adaptation - Hospital modifies emergency room to provide both
emergency care and outpatient surgery adaptation 16
Slide 18
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Election to capitalize repair and maintenance
costsNEW Annual election to capitalize repair and maintenance costs
IF: - Incurred in carrying on a trade or business - Treated as
capital expenditures in books and records Election applies to all
repair and maintenance amounts capitalized for book purposes -
Costs treated as improvements to tangible property Depreciation
begins when improvements placed in service - Does not apply to
repairs of rotables accounted for under optional method 17
Slide 19
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Dispositions/GAAs May be applied to taxable
years beginning on or after Jan. 1, 2012, and before applicability
date of final regulations - Certain elections may be made for years
in which the timely filed tax return has already been filed
Building (including structural components) is the asset - No GAA
election necessary to forego disposition loss Dispositions
generally only include structural components if make annual partial
disposition election - Required for specified transactions (sale or
section 165, 168(i)(7), 1031 or 1033 transaction) Annual GAA
election - Narrow definition of qualifying disposition Special rule
for IRS adjustments to repairs 18
Slide 20
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Partial Dispositions For purposes of the rules
for dispositions of MACRS assets, a disposition includes a
disposition of a portion of an asset: as a result of a casualty
event for which gain, determined without regard to Code Sec. 1245
and Code Sec. 1250 isn't recognized in whole or in part under Code
Sec. 1031 (like-kind exchanges, or Code Sec. 1033 (involuntary
conversions, in a transfer of a portion of an asset in a
transaction described in Code Sec. 168(i)(7)(B) (certain
transactions involving corporations or partnerships), in a sale of
a portion of an asset; in a disposition, other than one listed
above, of a portion of an asset if the taxpayer makes an election
to treat the disposition of the disposed portion as a disposition.
19
Slide 21
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. Questions? Thank you !!
Slide 22
2012 McGladrey LLP. All Rights Reserved. 2013 McGladrey LLP.
All Rights Reserved. This document contains general information,
may be based on authorities that are subject to change, and is not
a substitute for professional advice or services. This document
does not constitute assurance, tax, consulting, business,
financial, investment, legal or other professional advice, and you
should consult a qualified professional advisor before taking any
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affiliates and related entities are not responsible for any loss
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