Tangible Property Capitalization Regulations FAQ Submission
Procedural and Filing Questions
1. Does
MeF support efiling Form 3115? If so, is it part of the return package or is it
submitted as a pdf attachment? If not, we will have to mail one copy to Ogden
and another with Form 8453, right?
2. When
filing the Ogden copy, can we submit batches of Forms 3115, whether multiple
forms from one client or from many clients, in one mailing?
3. Does
the re-imposition of the scope limitations for these accounting method changes
following the 2014 tax year mean that the changes will no longer be automatic?
4. Does
the Service have plans to make any of the changes in Rev. Procs. 2014-16 and
2014-54 non-automatic after the 2014 tax year?
5. Many
of my clients retain their accounting records for only seven years. Though some older improvements are listed on
the fixed asset ledger, the clients have no records of repair activities
undertaken more than seven years ago. We can calculate a section 481(a)
adjustment for these clients going back seven years for any changes from repairs-to-improvements
and as far back as the depreciation schedules permit for improvements-to-repairs.
Will our inability to calculate the section 481(a) adjustment for repairs that
should have been capitalized that took place more than seven years ago
invalidate our clients’ Form 3115 filings?
6. My
clients never throw away anything. Do I have to audit the underlying accounting
information going back to day one of the taxpayer’s existence when calculating
the section 481(a) adjustment or may I rely on the taxpayer’s current book
accounting procedures, their existing records, and their oral testimony to calculate
the section 481(a) adjustment consistent with professional standards? (Ed.
Explanation: Many practitioners are concerned that they will have to review
decades of return expenses to determine whether anything needs to be capitalized
under the new regulations.)
7. If
a cost was capitalized as an improvement, (but should have been expensed as a
repair under the new regulations), and was expensed under section 179 in a now
closed year, can we change the treatment of this cost as part of a method
change?
8. One
of my clients early adopted portions of the new regulations without filing a
Form 3115 or taking a section 481(a) adjustment into account. Should they file
a PLR request for that year or should they file a protective Form 3115 for the
current year?
9. Will
the Service provide sample Forms 3115 illustrating the abbreviated method changes
for small taxpayers?
Substantive Questions – Overall
1. Some
national presenters have opined that most small taxpayers do not have
accounting methods and thus can adopt these new regulations without filing a
Form 3115 or taking a section 481(a) adjustment into account. In this view, the taxpayer would, at most,
file a Form 8275-R to adopt the new regulations without filing a Form 3115. My
understanding has always been that taxpayers must use consistent accounting
methods unless granted consent to change by the Commissioner. Would the waiver of the five-year item scope rule
mean that taxpayers without a consistent method can, and should, file a Form
3115 to adopt the new regulations?
2. Some
national presenters have suggested that failure to adopt the new regulations
properly could lead to permanent differences from depreciation disallowances in
Exam. My understanding has always been that Examining Agents are generally
required to make accounting method changes on an accounting method change basis
(with a section 481(a) adjustment) in the earliest open year unless the change
requires a cut-off method or the taxpayer lacks the records to compute (at
least a reasonable estimate of) a section 481(a) adjustment. Is there new
guidance that overrides Rev. Proc. 2002-18?
Substantive Questions - Materials and Supplies
1. My
client currently expenses all Units of Property or components that cost $1000
or less. The client does not have an Applicable Financial Statement and has
never been audited, but this de minimis expensing threshold clearly reflects
income under prior law. These expensed UoPs and components are treated as
office supplies in the taxpayer’s books and records and treated as incidental
materials and supplies on its tax return. The client is a professional services
provider with no non-incidental materials and supplies and whose definition and
treatment of incidental materials and supplies already conforms to the new
regulations in all other respects.
a.
Is the taxpayer required to adopt the
$200-or-less UoP rule as part of change 186?
b.
If so, does adopting this rule limit the
taxpayer’s ability to expense UoPs costing more than $200 under its existing de
minimis expensing policy?
2. In
Example 9 of section 1.162-3(h), the rationale is unclear. Would you please explain
if the clear-reflection-of-income rule is being invoked to prevent the
expensing of these apparently incidental supplies or whether storing the two
cartridges for next year amounts to an inventory?
Substantive Questions – The De Minimis Safe Harbor
1. None
of my clients have Applicable Financial Statements, but my professional relationship
with them involves different situations. How would the DMSH apply, if at all,
in the following situations?
a.
The taxpayer brings in all records of income and
expense at the end of the year. The return preparer performs the necessary
bookkeeping, makes all capitalization decisions, and then prepares a tax
return. The taxpayer uses this tax return for managerial accounting purposes
and for credit purposes. Assuming the preparer consistently applies a $500 de
minimis expensing policy, does this qualify for the DMSH?
b.
The taxpayer maintains its own books and
records. Under its accounting procedures, the taxpayer expenses everything.
Each tax season, the return preparer capitalizes newly acquired or produced
assets and improvements all of which cost more than $500. The taxpayer uses its
books and records for managerial and credit purposes. Does the taxpayer qualify
for the DMSH?
c.
The taxpayer maintains its own books and
records. Under its accounting procedures, the taxpayer places all assets into a
suspense account called “CPA-figure-it-out”. After year end, the return
preparer applies a $500 de minimis expensing threshold and then capitalizes or
expenses improvements and repairs as required under applicable tax law. Does
this qualify for the DMSH?
2. One
of my clients has audited tax-basis financials using OCBOA. Does this qualify them
for the $5,000 DMSH?
3. One
of my clients submits unaudited, unreviewed financial reports to a local
farmers cooperative acting as the agent of a government farm service agency.
Does this qualify them for the $5,000 DMSH? If so, does it matter if the
financial reports are prepared on a tax basis?
Substantive Questions – Repairs and Improvements
1. I
have always advised my clients to take positions on repairs and improvements
that are warranted under existing case law. Assuming this is true, are there
any situations where the new regulations are not taxpayer-favorable
interpretations of existing law? In other words, do I need to worry about positive
section 481(a) adjustments or, to the extent there are adjustments, will they usually
be negative?
2. Is
it possible to properly expense a roof repair in 2011 without setting an
accounting method of expensing? Some practitioners tell me I need to look at
the facts-and-circumstances of each repair or improvement to make a
determination. In other words, a roof repair may have been properly expensed in
2011 and a different roof improvement may be properly capitalizable under the
new regulations in 2014. Assuming I used the building as the Unit of Property
in both years and the 2011 repair expense is proper under the new regulations,
is there an accounting method change in this situation?
3. One
of my clients acquired an existing shopping center several years ago. One of
the tenant suites is separated from the remainder by a party wall with no doors
or windows. Is this tenant suite treated as a separate Unit of Property from
the rest of the building?
4. One
of my clients acquired a small office building for use in its trade or business.
The building has a stream running through the middle of it. The two halves are
connected by a bridge, but have no other connecting parts. Both halves are
treated as a single building in the client’s books and records and qualify for
treatment as a single asset for disposition purposes. Are these two separate
Units of Property for improvement purposes?
5. One
of my clients owns a ten-story office building. Each floor is occupied by a
single tenant. This year, one of the tenants moved out at the end of its lease and
was replaced by a new tenant. At the end of the lease, the leasehold improvements
constructed for the tenant (and owned by my client) were demolished. New
improvements were constructed for the new tenant.
a.
For purposes of the BAR tests, does the
identification of the improvements as section 1250 building components or section
1245 tangible personal property impact whether the replacement improvements as
restorations (assuming the adaptation and betterment rules do not apply)?
b.
Assuming all of the disposed and replacement assets
are section 1250 structural components (and not part of an enumerated building
system), would the new assets generally not qualify as a restoration and can be
expensed as a repair? Or would section 168(i)(8)(B) require the demolished assets
are treated as a disposition and thus the replacement assets must be
capitalized as a restoration?
6. Example
24 of section 1.263(a)-3(i)(7) identifies “partition walls separating the
bathroom area” of a hotel as section 1245 assets. This appears to contradict
the guidance in the Field Directive on Asset Class and Depreciation for Casino Construction
Costs. Can cost segregation professional rely on this new example to take this
position?
7. As
written, the regulations appear to suggest that as long as an asset is properly
includible within the ITC definition of a building and its structural
components, it will be part of the building Unit of Property, even if it is in
a shorter recovery period. The exception is where the taxpayer subsequently
changes the asset to a different recovery period. (Section 1.263(a)-3(e)(5)(i)
explicitly does not apply to building Units of Property.) Is this a drafting
error?
Substantive Questions – Dispositions
1.
Will the Service please provide the applicable
series identifiers for the safe harbor Producer Price Indexes that are used to
determine the unadjusted basis of a disposed asset or component?
2.
If I use the safe harbor PPI method for an asset
placed in service before the switch to the Final Demand index but disposed of
after the switch, do I use the index combination principles from the
dollar-value LIFO IPIC method to combine the Final Demand and Finished Goods
indexes or do I just use the Finished Goods index from the current and original
years?
3.
When using the safe harbor PPI method for
restorations, do I use the annual index or the monthly index?
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