New Repair and Improvment Regulations

[WhiteOleander]

I am confused regarding the election for the new repair and improvement regulations. Do I only make this election if I want the new rules to go into effect for years prior to 2014? If I don't want to change the depr. from 2013 or 2012 to conform to the new regs, I just keep going as usual? Then I would not need to file the 3115 because I am not electing to change the accounting method?

It seems confusing. IF it is mandatory, then it is not an election.

Am I mixing apples and oranges????

[TXEA]

I assume that you are referring to the De minimis safe harbor election. This election is made each year that you wish to apply the election to items costing $500 or less.

As for the prior years you may need to file Form 3115 to adopt a change in accounting method for supplies, Units of Property, partial dispositions, etc.

Basically, they are making us File the Form 3115 to indicate our compliance with the new regulations regarding tangible property capitalizing and expensing rules. This issue is the subject of much angst and frustration for the coming filing season. It does seem possible to file the Form 3115 with a -0- 481a adjustment. Although I wonder what is being changed if there is no 481a adjustment other than us just saying "we are complying with the Regs"

There are some who are filing so called "blanket protective filings" to adopt all the changes (I think 184-193). This does not make sense to me as some of the changes are mutually exclusive. For example, if you are a not a dealer, don't file for the change saying you are dealer electing.....whatever it is.

Further, the regulations do not spell out the time period which a taxpayer must review to determine any 481a adjustments. For example, if you replaced a roof in 2001 and you want to elect the partial disposition, must you have the records from 2001 to know if that was the first or second replacement of the roof. Also, one might theoretically need expense records to see if one expensed a roof in 2001. If it is not on depreciation schedule, do we need to inquire of large repair deductions for years where we have no records?

If you depreciated an item that would qualify under the routine maintenance safe harbor, how would we know if the depreciation schedule just says "Building Improvements"? I have seen this quite often.

Is the taxpayer required to adopt the $200 UOP under change 186? If so, does that limit the taxpayer from expensing the item if it "clearly reflects income"?

Must clients who have always expensed incidental materials and supplies adopt change 187 acknowledging what they are already doing?

If the client purchases parts to repair machinery costing $600 and the BAR standards are not met, is it clear this is a deductible expenditure as a repair? I ask this since some have posited that anything over $500 should be capitalized.

Who determines accounting practices? If the preparer keeps the books, does that constitute the client's accounting policy? If the client keeps the books and uses a suspense account for items in question, does that not involve consistent use of accounting practices? If the client keeps the books and the preparer makes adjustments to the books to comply with accounting practices, is this acceptable? I know these questions sound strange, but just wait it could be an issue.

This board needs a good discussion on this topic, so everyone please respond.

[AZUKHiker]

Try TaxPro Talk

I assume that you are referring to the De minimis safe harbor election. This election is made each year that you wish to apply the election to items costing $500 or less.

This board needs a good discussion on this topic, so everyone please respond.

If you want a good technical discussion go this thread at TaxPro Talk. Currently 567 replies and 12 pages. Some good contributions there although no agreement on what to do!!!!

http://www.taxprotalk.com/forums/viewtopic.php?f=8&t=1621&sid=3dc6640e52c192e40a5a9ea54854f5f2

[TomJ]

TXEA - adding to your last point... what if there are no books? If the clients don't keep books and the tax preparer is not an accountant, repairs / improvements are classified following facts and circumstances, case-by-case and reported that way on Sch C or Sch E. Is that wrong?

Grandma Jones takes her shoebox of receipts to Jackson Hewitt and her taxes get done. Does she have accounting methods that could be changed? Or, does the tax preparer simply follow the new regs and file a 3115 for those items that retroactively need to be changed (e.g. something was capitalized previously that could have been expensed under the new rules) with a 481(a) adjustment? Is that 3115 filing and 481(a) adjustment that would be in the taxpayer's favor mandatory? Or, can the taxpayer decide not to file it because paying for a 3115 may be more than the benefit the timing difference benefits?

Lots of questions... unfortunately, no answers.

[Lion]

If you were in business, you had books. They may have been a mess. They may not have complied with the law at the time; your tax preparer may have cleaned them up to comply on your tax return. But, they were your books. And, they almost certainly do not comply with the new regs, so you will probably need Forms 3115 to come into compliance. You will probably need an election or two, also. And, should've made some decisions by 1 January 2014 for that tax year. It's a whole new ballgame.

[TXEA]

TomJ - It is all going to be facts and circumstances. If Grandma Jones has a Schedule C with a lot of equipment, supplies, and repairs/maintenance, then yes she probably needs to file a Form 3115.

If she has a rental property, then she very well might need to file a Form 3115.

If she has a business with a computer, fax machine, and a telephone, few repairs or supplies, then you probably can get by without a Form 3115. You will just use the elections.

Either way, you need to review the Materials & Supplies provisions of the TPR's because that is the part that will impact most businesses (and then determine what clients you have that will be impacted). Although, I think its ridiculous.

[WhiteOleander]

Ok this is a scenario for one of my corps. S-Corp "Q" is retail trade business. Gross receipts are approx. 1.5 mil. Last year, they had to do repair and maint. on the bldg. They spent around 58000 for parking lot repair, electrical, and plumbing. So, this would not have been deductible under the new repair and maint rules because it is more than 10000. (bldg. basis is 180,000).
Would a 3115 be required? They do not need to change the acct. method because it would not qualify for the expensing. I say no. Please tell me where I am wrong.

[Lion]

I don't know. What happens when they make a partial asset distribution, working on the plumbing again, for instance. They will have to continue depreciating original and this plumbing and then the even newer. But, if they file 3115 to come into compliance with the new regs, then they may be able to write off remaining depreciation on older plumbing work when they make new -- and it might be expensable if less than % of building or less than 10,000 next time but won't be if you have to rely on "last longer than a year." A lot more money in your client's pocket sooner. I don't want my clients mad at me when they find out how much their friends saved who have rentals, for instance. I'm looking at 3115s as cover my butt as much as save my clients money.

[TXEA]

White - your expenses of parking lot, electrical, and plumbing consists of 2 of the 3 UOP's. Not quite sure where the parking lot would fit. For the electrical and plumbing, you will have to analyze whether the expenditures constituted a betterment, adaptation, or restoration (BAR Standard). Remember, the STSH (2%,10000) only applies for the purposes of the election. The election allows you to avoid having to apply the BAR standard for R/M, improvements, etc.

If you do not qualify for the election, then you apply the BAR standard to each expenditure. If the BAR standard is not met, then you can still deduct the expenditures as a repair.

For a property of this size, it will be important to review prior year returns and records to determine what accounting changes need to be applied and compute any necessary 481a adjustment.

In the past, how have you handled the parking lot resurfacing?

[WhiteOleander]

White - your expenses of parking lot, electrical, and plumbing consists of 2 of the 3 UOP's. Not quite sure where the parking lot would fit. For the electrical and plumbing, you will have to analyze whether the expenditures constituted a betterment, adaptation, or restoration (BAR Standard). Remember, the STSH (2%,10000) only applies for the purposes of the election. The election allows you to avoid having to apply the BAR standard for R/M, improvements, etc.

If you do not qualify for the election, then you apply the BAR standard to each expenditure. If the BAR standard is not met, then you can still deduct the expenditures as a repair.

For a property of this size, it will be important to review prior year returns and records to determine what accounting changes need to be applied and compute any necessary 481a adjustment.

In the past, how have you handled the parking lot resurfacing?

Thanks TXEA,

This SCorp is relatively new. The bldg. went into service at the very end of 2011. The repairs were in 2013. They were restoration repairs due to a leak that damaged the bldg. and parking lot.