Tangible Property Regulations Compliance: New Client Due Diligence

Posted by Don Warrant on 4/11/17 8:55 AM

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If your firm has taken on new clients since 2014, make sure your new clients are in compliance with the tangible property regulations.


All taxpayers are required to comply with the tangible property regulations for tax years beginning on or after January 1, 2014. These regulations address every phase of an asset’s life cycle from acquisition, to repair and maintenance, to disposition. To comply with the regulations, taxpayers filed Form(s) 3115 to make changes in accounting methods and received IRS audit protection for all prior years, or small businesses elected to change their accounting methods beginning with the 2014 tax year and forgo IRS audit protection for all prior years.

The regulations create new criteria for classifying costs as de-minimis, materials and supplies, and repairs and maintenance, and new rules for the disposition of assets, and include many taxpayer favorable elections and safe harbors. The elections and safe harbors require annual consideration by tax return preparers. Certain elections require a statement to be filed each year with a timely filed tax return and other elections are made by reporting on the tax forms. In addition, certain safe harbors require a change in accounting method to adopt.

New Client Tangible Property Regulation Due Diligence

For each new client, you should maintain documentation in your tax file supporting their compliance with the tangible property regulations as required, beginning with the 2014 tax year. This documentation is needed to support your firm’s tax return signing position and in the event of an IRS examination.

If your new client was a small business that elected to follow the procedures outlined in Rev. Proc. 2015-20, then you should maintain the documentation supporting the method changes required by that procedure which are as follows:

  1. Capitalize costs that facilitate the sale of property per Reg. Sec. 1.263(a)-1(e);

  2. Capitalize amounts paid or incurred to acquire or produce tangible property per Reg. Sec. 1.263(a)-2;

  3. Capitalize or expense amounts that improve or repair a unit of property (UoP) per Reg. Sec. 1.263(a)-3;

  4. Make changes in identifying the UoP per Reg. Sec. 1.263(a)-3(e) or, in the case of a building, identifying the building structure or building systems under Reg. Sec. 1.263(a)-3(e)(2);

  5. Adopt new rules for the identification and disposition of property per Reg. Sec. 1.168(i)-1, 7, & 8; and

  6. Consider new elections and safe harbor provisions that were created in connection with these regulations.

If your new client is unable to provide this documentation or you independently determine that your new client has not complied with the tangible property regulations, then Forms 3115 should be filed with the 2016 tax return. In the case of a small business, any Section 481(a) adjustment calculated in connection with a method change should not precede the 2014 tax year.

Tangible Property Regulation Compliance Assistance

CSP360 has developed expert knowledge of the tangible property regulations and implementing procedures and providing training and reference materials to our strategic partners. Please contact us regarding the benefits of a tangible property regulation compliance review for your new clients.


Tags: tangible property regulations, Don Warrant, tax accounting

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