Tuesday, November 25, 2014

The Final Tangible Property Capitalization Regs (Presenter Vignettes)

I've fallen off my promised posting schedule to work on more important projects. One of these projects involves guidance on the final tangible property capitalization regulations. As part of this process, I have been collecting incorrect statements from professionals presenting on this topic. I won't name names, but here are some of the more interesting ones.

  • The de minimis expensing is made once and is irrevocable. It is made once each year and is irrevocable for that year. You still have to file the election every year.
  • If you do not file method changes in tax year 2014, you will permanently lose tax deductions. Only timing differences qualify for method change treatment. If you fail to file a method change application in 2014, your clients will still get the deductions. It may not be when and how they would like them, but they will still get their deductions. Even if a change is made under audit, since these are timing differences, the agent would be required to follow Rev. Proc. 2002-18 and make the change on a method change basis in the earliest open year.
  • The automatic method changes will not be available after tax year 2014. The automatic method change for late partial disposition elections will not be available after tax year 2014. It will still be available in later years by filing a private letter ruling request. Otherwise, the only things slated to expire are the scope waivers. In general, scope waivers permit an automatic change in circumstances where it would ordinarily be prohibited. For example, if a taxpayer changed its Unit of Property definitions in 2012, the waiver of the five-year item scope rule allows it to make an automatic change in 2014. For the most part, these waivers are only relevant to taxpayers under exam or big taxpayers who have already made method changes in these areas. The automatic changes themselves are not going anywhere. 
  • If you do nothing, your taxpayers will have a zero dollar expensing threshold. This is the most puzzling comment I have run across. Most taxpayers already have an expensing policy for book and tax purposes where they expense items costing less than a set dollar amount. To change from that is an accounting method change, which would need advance consent from the Service under Rev. Proc. 97-27. If a client does nothing, they would continue to follow their existing method and would need to prove clear-reflection-of-income under prior law if examined. After all, the de minimis expensing safe harbor is just a safe harbor.
The point of the above anecdotes is not to ridicule any speaker, but rather to correct some of the disinformation floating around out there. After all, it's hard enough to get right as it is. Also, everything I've said above can be substantiated by the regulations, revenue procedures, or informal, public comments by Treasury or Chief Counsel. Good luck.

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