Tangible Property Tangible Property Regulations Overview - PowerPoint PPT Presentation

Tangible Property Tangible Property Regulations Overview Regulations Overview Trent Baeckl, CPA Trent Baeckl, CPA Tax Senior Manager Tax Senior Manager December 12, 2013 December 12, 2013 @PerkinsCo @PerkinsCo

Presentation Overview Presentation Overview  How did we get here?  What areas have changed?  What should I focus on?  What are my must dos before year end? @PerkinsCo @PerkinsCo

Legislative Background Legislative Background  08/18/06 – Proposed Regs. Issued  03/07/08 – Re-proposed Regs. Issued  12/23/11 – Temporary & Proposed Regs. Issued  11/20/12 – Notice Extended Effective Date to 1/1/14  09/13/13 – Final “Repair” Regs. Issued under 263(a) & Proposed “Disposition” Regs. Issued under 162(a)  Before 12/31/13 – Final “Disposition” Regs & Guidance on Accounting Method Changes Expected @PerkinsCo @PerkinsCo

Transition Rules Transition Rules  Revenue Procedures with accounting method transition guidance expected to be released before year end, likely December, 2013  Anticipate simplified procedures for change of accounting methods  Mandatory application of final regulations in 2014  Transition years 2012 and 2013:  Option to adopt to apply final regulations retroactively to 2012 and/or 2013  Apply temporary regulations to 2012 and/or 2013  Apply existing law to 2012 and 2013 4 @PerkinsCo @PerkinsCo

Major Areas Covered Major Areas Covered  Materials & supplies (M&S)  Amounts paid for acquisition or production of tangible property  Repairs & maintenance (R&M)  Capital expenditures (Unit of Property, or UOP)  Amounts paid for improvements to tangible property (BAR standards) @PerkinsCo @PerkinsCo

Determining Deductibility Overview Determining Deductibility Overview Does De Minimis Is an YES Safe Harbor expenditure apply? deductible? NO Does Routine YES Maintenance apply? (Cannot include to Improvements) Deductible NO Expenditure Does Small YES Taxpayer Safe Harbor apply? NO Is this NO improvement to property? YES Capitalize Expenditure @PerkinsCo @PerkinsCo

M&S - Definition M&S - Definition  Tangible property used or consumed in normal business operations that is not inventory and:  Is a component acquired to maintain, repair, or improve a UOP owned or leased  Consists of fuel, lubricants, water and similar items expected to be consumed in 12 months or less  Is a UOP with an economic useful life of 12 months or less, beginning when UOP is used or consumed  Is a UOP with an acquisition cost of $200 or less  Is identified in published guidance as M&S @PerkinsCo @PerkinsCo @PerkinsCo

M&S - Treatment M&S - Treatment  General Rule  Incidental M&S deductible when purchased  Non-incidental M&S deductible when used or consumed  New Provisions  Deduct any M&S in year purchased if safe harbor election is made  Election to capitalize and depreciate M&S only for rotable, temporary or emergency spare parts @PerkinsCo @PerkinsCo @PerkinsCo

Acquisition/Production of Property Acquisition/Production of Property › Must capitalize: • Inherently facilitative costs • Incurred prior to in-service date • Defend or perfect title to property • Required under 263A (unicap rules) › Can expense: • Internal labor and overhead costs • Investigatory costs (“whether and which” for real property only ) @PerkinsCo @PerkinsCo

Acquisition or Production of Property Acquisition or Production of Property › A taxpayer must capitalize costs incurred to acquire or produce a unit of real or personal property. YES When subject to the uniform Were costs of employee capitalization rules under compensation or overhead incurred to acquire property Optional Code Sec. 263A, a taxpayer is c apitalization required to capitalize direct NO permitted by and indirect costs to produce election, property and property not required Were inherently facilitative acquired for resale. YES amounts incurred to determine whether to acquire real property NO Were costs incurred Were amounts Were transaction prior to the property Was this an paid to defend or NO NO NO NO Do not costs incurred to being placed acquisition cost protect title to capitalize facilitate acquisition or in service, such as of property? real or personal production of property? repair or installation property? costs? YES YES YES YES Capitalize @PerkinsCo @PerkinsCo

De Minimis Expensing Rule De Minimis Expensing Rule  Safe Harbor  $5,000 with AFS; $500 without AFS  Transaction & additional costs  $200 for non-incidental M&S  Written policy requirement  Annual election @PerkinsCo @PerkinsCo @PerkinsCo

UOP – Other Property UOP – Other Property  General Rule – Functional Interdependence  A single UOP when the placing in service of one component is dependent on another component  Plant Property  UOP is divided into smaller units comprised of each component that performs a discrete and major function or operation within th e functionally interdependent machinery/equipment  Network Assets  UOP is determined by facts and circumstances or as provided by published guidance @PerkinsCo @PerkinsCo @PerkinsCo

Unit of Property – Other Property Unit of Property – Other Property Functionally Interdependent: Comprises a single unit of property when the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer . Plant Property: Network Assets: Railroad track Unit of Property as determined is Oil and gas pipelines further divided into smaller units Water and sewage pipelines comprised of each component Power transmission that performs a discrete and Distribution lines major function or operation Telephone and cable lines within the functionally Unit of Property is determined by the interdependent machinery or taxpayer’s particular facts and circumstances except as provided in equipment. published guidance. 13 @PerkinsCo @PerkinsCo

UOP – Buildings UOP – Buildings  Nine Building System Components  Building Structure (Shell)  HVAC  Plumbing  Gas Distribution  Electrical  Elevators  Escalators  Fire Protection  Security Systems @PerkinsCo @PerkinsCo @PerkinsCo

UOP – Buildings UOP – Buildings Building Unit(s) of Property and Common Components Building HVAC Plumbing Gas Electrical Elevators Escalators Fire Security Structure Distribution Protection Systems • • • • • • • • • Roof Motors Pipes Pipes Wiring Elevator Rails Sensing & Window & • • • • • Walls Compress Drains Gas Utility Outlets Boxes Steps Detection Door Locks • • • • • • Floors ors Valves Equipment Junctions Control Supporting Devices Security • • • • • Ceilings Boilers Sinks Lighting Equipment Equipment Computer Cameras • • • • • • Foundation Furnace Bathtubs Fixtures & Cables & Controls Controls Recorders • • • • Chillers Toilets Connector Movement Sprinkler Monitors • • • • Pipes Water & Electrical Equipment Heads & Motion • Ducts Sewer Utility Mains Detectors • • • Radiators Collection Equipment Piping & Security Equipment Plumbing Lighting • • • Water Alarms Alarms • • Utility Control Entry Equipment Panels Access • Signage @PerkinsCo @PerkinsCo @PerkinsCo

UOP – Leased or Condo Property UOP – Leased or Condo Property Lessee Condo Was the expenditure for the repair or improvement of: UOP is the portion of each UOP is the individual unit Co ‐ op building and building owned and systems subject to the its structural lease components Is the taxpayer’s ownership interest the entire building? YES NO UOP is the portion of the UOP is the entire building building and/or building system or building structure system in which the taxpayer has possessory rights @PerkinsCo @PerkinsCo

UOP Examples – Real Property UOP Examples – Real Property Real Property Expenditure UOP Retail Store – Stand ‐ alone Store Refresh – Lighting replacement Electrical system Retail store ‐ Shopping Mall (leased Leased portion of building electrical Store Refresh – Lighting replacement space) system Office – owned building Remove conference room wall Building structure Building structure within leased Office – leased space Remove conference room wall space Leased portion of building HVAC Office condo HVAC Unit Replacement system Apartment Building Single Unit Heat/Air replacement Building HVAC System @PerkinsCo @PerkinsCo

UOP Examples – Other Property UOP Examples – Other Property Personal Property: Non ‐ Building Expenditure UOP Restaurant oven Burner replacement Oven Garbage truck Engine repair / replacement Truck New carpet for individual Apartment unit furnishings Carpet unit Donut bakery manufacturing Knife replacement / line – interconnected mixers, ovens, conveyers, loaf Slicer component sharpening slicer, packaging Retail Donut Store Bakery – interconnected mixers, Knife Entire baking line ovens, conveyers, loaf slicer, packaging replacement/sharpening Power Plant – Coal pulverizers, boilers, turbine, and a Boiler – Refer to Industry Boiler tube replacement generator Guidance Rev. Proc. 2013 ‐ 24 @PerkinsCo @PerkinsCo