See also Real Estate

The IRS has issued regulations related to tangible property costs that affect repairs, supplies, and capitalization rules.

While the regulations are generally viewed as beneficial to taxpayers, for most taxpayers the biggest effect will be to require them to file Forms 3115, change of accounting method forms. Form 3115 has numerous pages and requires both text and computation. Essentially all taxpayers that have depreciation schedules will be required to file at least one 3115. In addition to filing the Forms 3115, compliance with the new regulation requires analysis of depreciation schedules and expense accounts.

In an effort to minimize the administrative cost of compliance, we have developed a prototype Form 3115 that will be used unless we determine that variation should be made based on our analysis of depreciation schedules and expense accounts or for other reasons.

In cases where the new regulations would have permitted us to expense items that were capitalized in prior years under the old rules, taxpayers may receive a current-year tax benefit. Conversely, where items in prior years were expensed under the old rules but must be capitalized under the new regulations, there may be a tax burden. It is anticipated that in many cases the tax effect in either direction will be negligible. Forms 3115 will be required regardless of the impact of the regulations on the taxpayer. Taxpayers with numerous iterations of improvements to real estate holdings might expect the greatest tax benefits.

De Minimis Safe Harbor Election:

The new regulations provide an election for taxpayers to expense de minimis amounts that would otherwise qualify as a capital expense. The election is an annual one and can be made in some years and not others. Taxpayers may expense individual items as much as $500 if they make the election and have a corresponding accounting policy in place. Taxpayers that have audited financial statements can expense individual items up to $5,000 if they have the same policy for financial statement purposes. In many cases, we will recommend that taxpayers take advantage of the de minimis elections.

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Please call us if you want to discuss the tangible property regulations and how it will impact your situation.