Hear that noise? That’s the collective intake of breath from property owners all over the U.S. when they hear estimates for 263(a) compliance... but there may be some good news, too....
Your role as a tax practitioner is to make sure your client has complied with all applicable Internal Revenue Code and Treasury Regulations. And due to the final tangible property regulations, that compliance work will require significantly more time and expense this year than your clients might be expecting—anywhere from tens to hundreds of hours per client.
Why is the compliance load so burdensome with this round of regulations? In a word: documentation. In addition to the significant investment of time to understand these complex regulations, the IRS is expecting all taxpayers that own or lease buildings to file at least one Form 3115 for method changes required to comply with the new regulations impacting building property. Otherwise, the taxpayer must show why such method changes weren’t required for their building property. As a tax return preparer, your professional standards for tax return preparation require that you document your client’s compliance with these Regulations to avoid potential preparer penalties.
The Good News: The Spoonful of Sugar That Will Help the Medicine Go Down!
The good news is that most commercial building owners are eligible for method changes and elections that will result in federal tax deductions. And those onerous and time-consuming Forms 3115 will protect those tax deductions in the event the IRS examines your client’s tax return.
So, to fulfill your own professional standards and to demonstrate to building-owning clients the benefits of compliance, tax return preparers should discuss (and clearly document the results of those discussions) each of the following tax-saving opportunities from the tangible property regulations:
- De minimis. Making this safe harbor election allows your clients to write off amounts paid to acquire, produce or improve tangible property—up to $5,000 per item or invoice for clients that have an Applicable Financial Statement and follow written accounting procedures ($500 for clients without an AFS). In addition to reducing taxable income, this safe harbor will protect amounts expensed in the event of an IRS examination.
- Small taxpayer safe harbor. This safe harbor, which is made on a building-by-building basis by eligible small taxpayers, also serves to reduce taxable income and to protect all amounts expensed from IRS examination. The total expenditures for the year for each qualified building may not exceed the lesser of $10,000 or 2% of the original cost of the building. If total expenditures for amounts paid to maintain and improve the building for the year exceed this limitation by any amount, the safe harbor is not applicable for that building.
- Dispositions. The “late partial disposition” election, which allows a tax deduction for portions of building property disposed of in prior tax years, is only available for the 2014 tax year. So use it or lose it!
- Improvements to tangible property. Many building owners have unknowingly capitalized repairs in prior years that now can be expensed. The identification of capitalized repairs is based on the new unit of property rules, which the regulations have defined as the building and its structural components, and eight specific building systems. A new three-part test is applied to each unit of property to determine whether the amount is a deductible repair.
Need help identifying opportunities to lower your clients’ tax bills while also bringing them into compliance? Read our guide to using the tangible property regulations to help clients and gain new business.