FOR LIVE PROGRAM ONLY Form 3115 Change in Accounting Method: Navigating the IRS Repair Regulations WEDNESDAY , MAY 4, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down • only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. • WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Form 3115 Change in Accounting Method May 4, 2016 Karen Messner Andrea Mouw KPMG Eide Bailly kmessner@kpmg.com amouw@eidebailly.com Ryan Corcoran RSM US ryan.corcoran@rsmus.com
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Agenda 1. Discussion of Repair Regulations and requirement to file Form 3115 2. Completing Form 3115 change in accounting method and required calculations 3. Implementation of change in accounting method regulations and Rev. Proc. 2015- 20 relief from Form 3115 requirements 5
Discussion of repair regulations and requirement to file Form 3115
Outline Overview of tangible property regulations Repair regulations De minimis election • • Materials and supplies • Repairs v. capital improvement Disposition regulations Identification of asset for disposition purposes • Full and partial asset dispositions • Industry Issue Resolution (“IIR”) guidance Requirements to adopt new rules 7
Tangible property regulations Generally effective for tax years beginning on or after January 1, 2014 Taxpayers could elect to “early adopt” the provisions prior to 2014 • Two different Regulation packages • “Repair Regulations” issued September 2013 ― Treatment of materials and supplies ― New de minimis safe harbor ― Identification of “unit of property” for repair and maintenance expenditures ― Differentiation between deductible repairs and capital improvements • “Disposition Regulations” issued August 2014 ― Identification of assets for disposition purposes ― Treatment of full asset dispositions ― Treatment of partial asset dispositions – mandatory and elective Rev. Proc. 2015-56 issued November 2015 provides IIR guidance for the retail and restaurant industries 8
Impact of regulations Provided new rules that taxpayers must follow in accounting for costs associated with fixed assets Addressed every phase of asset life cycle • Purchase • Repair and maintenance Disposition • Impacted all taxpayers with fixed assets Required many taxpayers to take affirmative steps to comply with new rules • Form 3115 to change taxpayer’s existing accounting methods • Elections to take advantage of certain provisions 9
Highlights in new repair regulations New categories and criteria for classifying costs associated with fixed assets De minimis expenditures • Materials and supplies • • Deductible repairs v. capital improvements ― Treatment of transaction costs and other costs associated with capital improvements 10
De minimis safe harbor election Allows taxpayers to deduct costs for tax purposes that are deducted for book purposes under capitalization policies and procedures Requires book-tax conformity for amounts covered by election Different thresholds and requirements based on whether taxpayer has Applicable Financial Statement (“AFS”) Financial statement filed with SEC, • Certified audited financial statement used for non-tax purposes (i.e., reports to • creditors or shareholders) or • Financial statement required to be filed with government agency 11
De minimis safe harbor Requirements for capitalization policies Must be in place as of the beginning of the tax year • Must be in writing if taxpayer has an AFS • • Must provide that amounts paid for an item with a cost below a specified threshold or a useful life of 12 months or less are deducted Dollar threshold Safe harbor limitations: • ― $5,000 for taxpayers with AFS; ― $2,500 for taxpayers without an AFS • Threshold applies on per-invoice or per-item basis 12
Materials and supplies: Definition Tangible property used or consumed in taxpayer’s operation that is not inventory and is – Component used to maintain, repair or improve tangible property; • • Fuel, lubricants, water and similar items reasonably expected to be consumed in 12 months or less; Unit of property with an economic useful life of 12 months or less; or • Unit of property with a cost of $200 or less • Rotable spare parts • Materials and supplies that are installed in unit of property, removed and repaired and re-installed Temporary spare parts Materials and supplies used temporarily until new or repaired part can be • installed 13
Accounting for materials and supplies Incidental materials and supplies deducted in year purchased Incidental materials and supplies are carried on hand and no physical inventories • are taken and no record of consumption kept Non-incidental materials and supplies deducted in year used or consumed Rotable and temporary spare parts used or consumed (i.e., deductible) when disposed Optional method allows taxpayer to account for rotables when installed, • removed, repaired and re-installed 14
Capital improvements Section 263(a): Taxpayers must capitalize amounts paid for new buildings or permanent improvements or betterments to property Amounts required to be capitalized include – • Invoice price; • Transactions costs that are inherently facilitative; and Work performed prior to asset being placed in service • Direct costs of improvements and indirect costs incurred “by reason of the improvement” must be capitalized 15
Repairs v. capital improvements Treas. Reg. § 1.263(a)-3: A unit of tangible property is improved if the amounts paid – 1. Are for a betterment to the unit of property; 2. Restore the unit of property; or 3. Adapt the unit of property to a new or different use Amounts that are not defined as improvements treated as deductible repairs 16
Unit of property – Buildings Each building and structural components is a single unit of property Expenditures must also be analyzed against building structure and the following building systems to identify any improvements: • HVAC system; • Plumbing systems; Electrical systems; • Escalators; • Elevators; • • Fire-protection and alarm systems; • Security systems; and Gas distribution systems • 17
Unit of property – Other assets General rule: Functional interdependence Assets are functionally interdependent if placing in service of one component is • dependent on placing in service of the other component by the taxpayer Special rules: • Plant property used to perform industrial process ― Must look at each component of machinery or equipment that performs discrete and major function Leased property • ― Look at portion of building or other property/system that is subject to the lease 18
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