Question:
Last year we heard about the new tangible asset regulations and how they would impact prior years in addition to tax year 2014. What about 2015? Is “TARS” still an issue for 2015?
Answer:
These new rules created a new method of determining whether changes to tangible assets should be capitalized or expensed. The major conceptual change is the new “unit of property” concept. The unit of property differs for buildings and non-buildings, and provides more clarity than previous IRS regulations.
The regulations state that a single Unit of Property includes components that are functionally interdependent. (There are specific rules for buildings which will be addressed in our next enewsletter.) Two components are functionally interdependent when one component’s in-service date depends on another component’s in-service date. In other words, you cannot use the first component without the second.
Improvements to a Unit of Property are NOT a separate Unit of Property, unless a lessee makes the improvements. There are special rules for plant property, leased property, and network assets.
Grasping the Units of Property rules can help you maintain appropriate fixed asset records for tax purposes. Having such records can make it easier to decide whether payments are for improvements or repairs.
The smaller the Unit of Property, the more likely the costs incurred to change the Unit of Property will be capital.
Contact your Dean Dorton advisor or Faith Crump at fcrump@deandorton.com or 502.566.1025 if you have any questions.