Tangible asset regulation

Article Dean Dorton

Question:

If you spend money to change a capital asset used in your business this year, then is the expenditure a capitalized improvement or an expensed repair?

Answer: 

Under the new Tangible Asset Regulations (TARS), you must capitalize all betterment, restoration, and adaptation expenditures as improvements to the unit of property (UOP). The regulations define these three terms as follows:

  1. A betterment is an expenditure that:
  • Corrects a material condition or defect that existed prior to acquisition or arose during production of the UOP,
  • Results in a material addition to the UOP, or
  • Results in a material increase in strength, capacity, productivity, efficiency, quality or output of the UOP.
  1. A restoration is an expenditure that:
  • Replaces a component of a UOP,
  • Repairs damage to a UOP,
  • Returns UOP to its ordinarily efficient operating condition if it deteriorated to a state of disrepair and is no longer functional for its intended use,
  • Rebuilds UOP to a like-new condition after the end of its ADS class life, or
  • Replaces major component or substantial structural part of UOP.
  1. An adaptation is an expenditure that adapts a UOP to a new or different use that is not consistent with the taxpayer’s intended ordinary use of the UOP when originally placed in service by the taxpayer.

Otherwise, the expenditure is a repair, and you can expense it in the current year.

Contact your Dean Dorton advisor or Faith Crump at fcrump@deandorton.com or 502.566.1025 if you have any questions.

Article Dean Dorton

Question:

If you renovate a building used in your business this year, then is the expenditure a capitalized improvement or an expensed repair?

Answer: 

It is important to understand how the “unit of property” concept has changed regarding buildings. Before the new rules, only the building in its entirety was considered one unit of property. Now, as many as nine building systems can make up one building, and each system is its own unit of property.

The nine systems that can make up a building are as follows:

  1. Heating, ventilation and air conditioning (HVAC) systems
  2. Plumbing systems (pipes, drains, sinks, toilets, etc.)
  3. Electrical systems (wiring, outlets, lighting fixtures, etc.)
  4. All escalators
  5. All elevators
  6. Fire protection and alarm systems (sensing devices, computer controls, sprinkler heads, etc.)
  7. Security systems (window and door locks, security cameras, recorder, monitors, motion detectors, etc.)
  8. Gas distribution systems
  9. Other structural components (roof, walls, floors, etc.)

To follow the new Building Systems rules, you may have to plan more carefully before you renovate and keep detailed records during each project. However, these rules may also provide more certainty that an expenditure appropriately expensed as a repair will pass IRS scrutiny.

Contact your Dean Dorton advisor or Faith Crump at fcrump@deandorton.com or 502.566.1025 if you have any questions.

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Article Dean Dorton

There are specific rules related to leased property outlined in the new tangible asset regulations, specifically related to unit of property.  As a reminder, the unit of property is the cornerstone by which taxpayers now will determine whether an expenditure should be capitalized or expensed.

For leased buildings, the unit of property will differ depending upon whether the taxpayer is the lessee or lessor.

If a taxpayer is a lessee of an entire building, the building structure and building systems are the units of property for the lessee.

If a taxpayer is a lessee of a portion of a building, the portion of the building structure or portions of the building systems subject to the lease are the unit of property for the lessee.

If the taxpayer is a lessor of a building, the entire building structure and building systems are the units of property; even if there are multiple tenants, the entire building and systems are still the unit of property for analysis of expenditures.

This is just a reminder related to the new tangible asset regulations, which are being implemented for tax years beginning after January 1, 2014.

If you have any questions regarding these regulations, please contact your tax advisor or Faith Crump at 502-589-6050 or fcrump@deandorton.com.

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Article Dean Dorton

The rules for Units of Property – Non-Building, the fifth topic in our series, define that a single Unit of Property, for property that is not a building, includes components that are functionally interdependent.

Functionally interdependent is defined as one component’s in-service date being dependent on other components’ in- service date.  Improvements to Units of Property are NOT separate Units of Property, unless they are improvements made by a lessee.  There are special rules for plant property, leased property and network assets.

Since the tests for capitalization are based on Units of Property, being able to understand and determine the Unit of Property is integral in maintaining proper fixed asset records for tax purposes.  The smaller the Unit of Property, the more likely the costs incurred to the Unit of Property will be considered expenditures to be capitalized rather than repairs to be expensed.

What this means to you:  To determine whether property is subject to capitalization or expense, we must look at the Unit of Property rules.  For non-building property, we must determine if the components are functionally interdependent, and placing one component in service is reliant on placing other components in service.

If you would like additional information or have any questions, please contact Faith Crump at fcrump@deandorton.com or 502-589-6050.

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Article Dean Dorton

The rules for Building Systems, the fourth topic in our series, clarify that a building has nine different units of property when determining if an expenditure is a capitalized improvement or a deductible expense.

The unit or property concept is the foundation for capitalization analysis.  The general rule is that all functionally interdependent components are a single unit of property.  Prior to these rules, only the building in its entirety was considered a unit of property.  Under these new rules, to determine if a building expenditure meets the improvement standard to be capitalized and depreciated over its useful life rather than a deductible expense, each of these following nine building systems are considered a unit of property:

  1. Heating, ventilation and air conditioning (HVAC) systems
  2. Plumbing systems (pipes, drains, sinks, toilets, etc.)
  3. Electrical systems (wiring, outlets, lighting fixtures, etc.)
  4. All escalators
  5. All elevators
  6. Fire protection and alarm systems (sensing devices, computer controls, sprinkler heads, etc.)
  7. Security systems (window and door locks, security cameras, recorder, monitors, motion detectors, etc.)
  8. Gas distribution systems
  9. Other structural components (roof, walls, floors, etc.)

What this means to you:  Through the Building Systems rules, building expenditures are analyzed as a part of one of the nine building systems, rather than the entire building, to determine if a capitalized improvement or a deductible expense exists.

If you would like additional information or have any questions, please contact Faith Crump (fcrump@deandorton.com) or Jeff Crumpley (jcrumpley@deandorton.com).

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Article Dean Dorton

This is the first in a six-part series of emails that will provide an overview of the new tangible asset regulations that were finalized in late 2013.  These are generally effective for tax years beginning after 1/1/14; as we approach year-end, there may be planning opportunities or required changes due to these new regulations.

These regulations impact ANY taxpayer that has capitalized assets or supplies, so almost everyone will be impacted somewhat by these rules.  In general, there are five areas that will impact most taxpayers:

  1. De minimis safe harbor rules
  2. Materials & supplies
  3. Unit of Property: functionally interdependent
    1. Building systems – now a separate structural component and what that means
  4. Unit of Property:
    1. Non-building
  5. Repairs vs. improvements – 3 tests

We will summarize each of these areas over the next five weeks, and hopefully provide guidance on potential action items that need to be addressed prior to year end.

Also of note:  Additional guidance was issued recently which has extended the ability to take a late partial disposition election in 2014.

What this means to you:  If you own a building that has recently had renovations or improvements, you may be eligible to claim a loss on the cost basis of the component that was replaced, removed or disposed of in prior years.

If you want additional information or have questions, please contact Faith Crump at fcrump@deandorton.com or 502-56050.

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