omaha tei presentation tangible property temporary regulations omaha, ne september 18, 2012 bryan...

Omaha TEI Presentation

Tangible property temporary regulations

Omaha, NESeptember 18, 2012

Bryan Pleskac

Deloitte Tax LLP

Ray Wilson

Deloitte Tax LLP

Copyright © 2012 Deloitte Development LLC. All rights reserved.

• Effective Dates/Transition Guidance• Temporary Regulations

– Discussion Areas• Materials and Supplies• De Minimus Rule• Units of property• Amounts paid to improve property• Routine maintenance safe harbor• Buildings• Disposition, retirements & general asset accounts

• Transition Guidance/LB&I Directive• Action steps

Outline

Effective Dates/Transition Guidance

Copyright © 2012 Deloitte Development LLC. All rights reserved

Effective Dates

• Temporary Regulations are generally effective for taxable years beginning on or after January 1, 2012

– Special rules apply for amounts paid or incurred in taxable years beginning on or after January 1, 2012 for:

• Materials and supplies

• De minimis rule

• Costs to facilitate

• Transition guidance issued March 7, 2012 (Rev. Proc. 2012-19 and 2012-20)

– Effective for taxable years starting after January 1, 2012

– 19 possible method changes under the guidance

– All automatic changes!

– Must file with 2012 or 2013 return

Temporary Regulations


Temporary Regulations

Discussion Areas

• Materials and supplies

• De Minimus rule

• Amounts paid to improve property

• Buildings

• Retirements, dispositions and general asset account election


Materials and Supplies – General Rules

• Material and supplies are tangible property used or consumed in the taxpayer’s operations that is not inventory and is:

– a component acquired to maintain, repair, or improve a unit of tangible property;

– fuel, lubricants, water, or similar items that are reasonably expected to be consumed in 12 months or less;

– a unit of property that has an economic useful life of 12-months or less;

– a unit of property with an acquisition or production cost less than $100; or

– property identified in future published guidance

• If the criteria above met, the item is deemed to be a “material or supply”, and therefore, not subject to capitalization.

• Optional election to capitalize and depreciate the materials and supplies

• Special rules for rotable and temporary spare parts


Materials and Supplies – Issues and Considerations• What you need to consider:

– What has changed?

• Materials and supplies definition has been provided

• Special methods for rotable spare parts

– Current treatment of materials and supplies?

• Timing of deductions - Incidental vs. Non-incidental (e.g. are supplies tracked?)

• Existence of rotables and current treatment

– Opportunities within the Temporary Regulations

• Expanded definition of materials and supplies (e.g. $100 items)

• Review balance sheet for material and supplies inventories and consider if these items are tracked for their usage

• Election to capitalize (e.g. NOL preservation)


De minimis Rule

• Applicable Financial Statement (“AFS”)• Written capitalization policy• Expense in AFS according to written

policy

Requirements

• .1% of tax gross receipts, or• 2% of depreciation on AFS

Deduction limited to greater of:


• To be eligible for the de minimis rule, the total aggregate amounts paid and not capitalized by the taxpayer must be less than or equal to the greater of $125,000 (0.1 % of its total gross receipts of $125M) or $140,000 (2 % of its total book depreciation/amortization $7M). Because the taxpayer pays $160,000 for the computers and this amount exceeds $140,000, it may not apply the de minimis rule to the total amounts paid for the 400 computers.

• To be eligible for the de minimis rule, the total aggregate amounts paid and not capitalized by the taxpayer must be less than or equal to the greater of $125,000 (0.1 % of its total gross receipts of $125M) or $140,000 (2 % of its total book depreciation/amortization $7M). Because the taxpayer pays $160,000 for the computers and this amount exceeds $140,000, it may not apply the de minimis rule to the total amounts paid for the 400 computers.

• However, if it makes an election to capitalize $20,000, the amounts paid to acquire 50 of the 400 computers purchased in Year 1, it would not be required to capitalize the amounts paid to acquire the 350 computers in Year 1.

De Minimis Rule - Example


De Minimis Rule – Issues and Considerations• What you need to consider:


• Previously no rules or guidance on capitalization thresholds; the temporary regulations now provide that guidance

– Identification of expenses to consider for the de minimis threshold

• Identify trial balance account containing tangible property

• Items qualifying as materials and supplies or repairs and maintenance (e.g. reduction of expenses for de minimis calculation)

• Items not related to tangible property (e.g. deductible repairs and services)

– Policy, system updates, and documentation

• Is the policy being followed (e.g. expenditures outside of policy limit currently deducted)?

• System updates for expenditure tracking on a go-forward basis (e.g. quantity fields, account mapping, description field assignments, etc.)

• Document accounts and create calculation templates for compliance workpapers


Determine the unit of property Apply the improvement standardsConsider the routine maintenance

safe harbor

Amounts Paid to Improve Property


Unit of Property

Buildings•Each building and its structural components is a UoP •Improvement standards are applied at the building & building system level

Plant Property•Functional interdependence is relevant•Discrete and major function standard must be applied

Network Assets•Based on facts and circumstances or as provided in published guidance•Functional interdependence test not determinative

Leased Property•Each building and its structural components (lessor) or the portion of each building subject to the lease and the structural components associated with the leased portion (lessee)•Improvement standards are applied to the portion of the building & building systems subject to the lease (lessee)

Other Property•Functional Interdependence•Facts & circumstances



safe harbor


Copyright © 2012 Deloitte Development LLC. All rights reserved

Amounts Paid to Acquire or Produce Tangible Property - Temp. Reg. § 1.263(a)-2T

• Acquire or produce a unit of real or personal property,

• Defend or protect title to a unit or real or personal property, or

• Facilitate the acquisition or production of real or personal property

Capitalize amounts to:

• Amounts treated as materials and supplies under Temp. Reg. § 1.162-3T

• Amounts subject to de minimis rule

Does not apply to:



Capitalizable

Improvement

Betterment?

Restoration?

Adaptation?



• Repair or replacement of a component of a unit of property and the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss (including casualty loss)

• Returns the unit of property to its ordinarily efficient operating condition if the property has

deteriorated to a state of nonfunctional disrepair • Rebuilding of the unit of property to a like-new

condition after the end of its class life • Replacement of a part or a combination of parts

that comprise a major component or a substantial structural part of a unit of property

Restoration

• Modification of a unit of property that is not consistent with the taxpayer’s intended ordinary use of the unit of property at the time the property was

placed in service

Adaptation

• Corrects a material defect existing prior to the taxpayer’s acquisition of the UoP or one that arose

during the production of the UoP; • Results in a material addition (e.g., physical enlargement, expansion or extension) to the UoP;

or • Results in a material increase in capacity, strength,

productivity, efficiency, quality, or output of the UoP

Betterment



• What you need to consider:


• More clearly defined criteria to determine deductible repairs

– Review prior repairs studies for impact of changes pursuant to the Tangible Property Regulations

– Review previously claimed repairs and maintenance expenditures (e.g. line 14) deducted for both book and tax purposes

– Review fixed asset ledgers for additional repair and maintenance reclassification opportunities pursuant to the Temporary Regulations

– System Updates, Documentation, and Policy Changes:

• Updates to capital request forms for tax “unit of property” and tax repairs requirements (e.g. checklists)

• Provide training sessions to facility managers and engineers to assist in the identification of tax improvements and repairs

• System updates for units of property, tax only repairs, and documentation of positions



safe harbor



Routine Maintenance Safe Harbor – Temp. Reg. § 1.263(a)-3T(f)

Amount paid is deemed to not improve the unit of property if it is for the recurring activities that a taxpayer expects to perform as a result

of the taxpayer's use of the UoP to keep the unit of property in its ordinarily efficient operating condition

• Safe harbor does not apply to buildings or structural components of buildings (or building systems)

• Routine maintenance is activities that the taxpayer reasonably expects (at the time the property is placed in

service) to perform more than once during the ADS class life of the UoP

• Consider recurring nature of activity, taxpayer’s experience, manufacturer recommendations, industry practice, treatment on AFS

• Does not apply to amounts capitalized as betterments, adaptations, and certain restorations


Buildings

• Each building and its structural components are a unit of property

Unit of Propert

y

• Building systems:• heating, ventilation, and air conditioning systems (HVAC)

• plumbing systems • electrical systems• all escalators; • all elevators

• fire protection and alarm systems • security systems • gas distribution systems

• other structural components identified in published guidance• Building structure, which is defined as the building and its structural components (other

than the sub-systems above)

Improvement

standards applied to


Buildings – Issues and Considerations• What you need to consider:

– What has changed?• Unit of property for building repairs and retirements re-defined• Building systems defined• Application to leased property

– Identification and basis determination:• Cost segregation studies, Building construction information (e.g. AIA

documents), Other reasonable methods, etc. for basis determination• Consider effect of reclassification or cost segregation studies on unit of

property– Policy, System Updates, and Documentation

• Identify building systems during construction and segregate in fixed asset systems

• Update capital request forms for building system specific questions for future projects

• Document and create calculation templates for compliance workpapers to show break out of building systems and basis information


Dispositions, Retirements & General Asset Accounts (Temp. Reg. §§ 1.167-8T and 1.168(i)-1T)

Retirement of a structural component of a building is a disposition under IRC § 168

Provide rules for accounting for assets to which IRC § 168 applies, and the rules for determining gain or loss on the disposition of such property

Rules are critical to operation of the restoration improvement standard

General asset accounting and associated elections require affirmative action and must be considered during the placed in service year of an asset to ensure flexibility when evaluating the deductibility of future expenditures


• Gain/loss recognized on retirement of a structural component of a building (now defined as a disposition)

• Loss (but not gain) recognized on the physical abandonment or transfer to supplies or scrap account (applies to components of buildings as well)

• Taxpayer may elect to treat a component of a UoP in a general asset account as a specific asset and deduct undepreciated basis at disposition

• A taxpayer is not precluded from claiming a repair deduction under the casualty loss restoration test for a UoP included in general asset

Dispositions and Retirements


• Elective

• Assets may be grouped into a single GAA if—– Same depreciation method (cannot combine bonus and non-bonus)

– Same recovery period

– Same convention (must be placed in service in same month, quarter, etc.); and

– Placed in service in same taxable year

• A single asset can be placed into a GAA

• If GAA elected, no loss on disposition recognized until all assets in GAA disposed of– Can elect to treat a component of an asset as a single asset for disposition

purposes• Structural components of buildings generally defined under section 48 regulations

• Definition of component must be consistently used for all assets in a single GAA

• Election provides flexibility in determining whether to take a loss on a disposition or possibility a deduction for repairs costs (assuming such costs are not a capitalizable improvement)

General Asset Accounts (GAA)


• What you need to consider:• What has changed?

– Treatment/timing of real property retirements/dispositions– Timing for recognition of gains and losses

• Current retirements methodology (e.g. retiring structural components of buildings) and conformation to Tangible Property Regulations

• Additional retirement opportunities and impact on repair expenditures (e.g. reverse prior retirements to sustain repair position)

• Application of GAA elections:– Elect GAA on building property (leased and owned) to minimize

compliance and avoid lost deductions (e.g. allowed or allowable)– Need for GAA elections for personal property (e.g. different book and tax

units)

Retirements, Dispositions & General Asset Accounts – Issues and Considerations

Transition Guidance/LB&I Directive


Transition Guidance

• Rev. Procs. 2012-19 and 2012-20 issued March 7, 2012– Automatic consent for method changes to comply with temporary regulations

for taxable years beginning on or after January 1, 2012

• Form 3115s due by extended due date of the return for the tax year of change

• Temporary regulations cannot be early adopted under this guidance

– Scope limitations waived for first and second tax years beginning after December 31, 2011

– Taxpayers receive back year audit protection upon filing national office copy of Form 3115

• National office copy sent to Ogden, UT

– Taxpayers file a single Form 3115 for all concurrent changes under §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, 1.263(a)-3T

• Special rules may apply for concurrent depreciation changes

• Must take into account § 263A


Transition Guidance – Common Method Changes

• Change made with § 481(a) adjustment• Can use statistical sampling to compute § 481(a) adjustment and

support amounts on post-change returns• Statistical sampling methods must comply with Rev. Proc. 2011-42

Change to deduct repairs/maintenance and change unit of property

for purposes of applying improvement standards

• Change made with § 481(a) adjustment• Can use statistical sampling to compute § 481(a) adjustment and

support amounts on post-change returns• Statistical sampling methods must comply with Rev. Proc. 2011-42

Change to capitalize (and if applicable, to

depreciate) improvements to units

of property

• Change made with modified § 481(a) adjustment• § 481(a) adjustment takes into account only amounts paid or incurred

in taxable years beginning on or after January 1, 2012

Change to apply de

minimis rule


Transition Guidance – Common Method Changes

• Affects determination of gain/loss on disposition and may affect determination of whether expenditure is a capitalizable

restoration• Change made with § 481(a) adjustment

• Can use statistical sampling to compute § 481(a) adjustment and support amounts on post-change returns

• Statistical sampling methods must comply with Rev. Proc. 2011-42

Change to dispositions of buildings

and structural components

• May affect determination of whether expenditure is a capitalizable restoration

• Change made with § 481(a) adjustment if asset is no longer owned by the taxpayer as of beginning of year of change

• Change made on a modified cut-off basis if assets are owned by the taxpayer as of the beginning of the year of change

• Unadjusted depreciable basis and depreciation reserve of asset as of beginning of year of change accounted for on new method

Change to make a general asset account

election for MACRS property placed in service in a taxable

year beginning before January 1, 2012


LB&I Directive (LB&I-4-0312-004 (3/15/12))• IRS to discontinue current exams with respect to positions taken on

original returns relating to—

• Whether costs incurred to maintain, replace, or improve tangible property must be capitalized under IRC § 263(a)

• Correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components)

• Does not apply to exam activity relating to costs for which the IRS has provided specific guidance separate from the temporary regulations

• For accounting method changes on or after 12/23/2011 for a tax year beginning before 1/1/2012, exam is to risk-assess the Form 3115

• For taxable years beginning on or after 1/1/2012 and before 1/1/2014, exam to determine if taxpayer filed method change pursuant to guidance during scope waiver period

Action Steps


• The temporary regulations are prospective. • Generally no impact for a financial statement reporting period ending prior to

March 7, 2012.• Financial accounting treatment depends on taxpayer’s intent to make

the accounting method changes under Rev. Procs. 2012-19 and 2012-20

Financial statement

impact

• Rev. Procs. 2012-19 and 2012-20 include automatic consent to change methods of accounting.

• Rev. Procs. 2012-19 and 2012-20 include waiver of scope limitations and allow taxpayers to change their methods of

accounting while under examination.

Rev. Procs. 2012-19 and 2012-20 are critical in

evaluating unrecognized tax benefit liabilities

• Taxpayers may generally begin to account for costs incurred after 12/31/2011 consistent with the temporary

regulations if the taxpayers expect to change their method of accounting pursuant to the temporary regulations and

the revenue procedures.

Amounts incurred in taxable years

beginning on or after January 1, 2012

ASC 740 Considerations


Determine how your company will accomplish the following…

Understand how the definitions of materials and supplies, UoP improvement, betterment, and routine maintenance affect the way your

business capitalizes or deducts assets

Understand how the de minimis rule might affect your capitalization threshold

Consider how the favorable rules relating to facilitative costs apply in your business

Understand whether and to what extent your business currently accounts for dispositions and what the appropriate method(s) might be under the

temporary regulations

Consider completing an assessment in advance of adopting the Temporary Regulations to determine potential impact and possible

system limitations


Bryan Pleskac

402 997 [email protected]

Ray Wilson

612 397 [email protected]

Contact info

mailto:[email protected]

mailto:[email protected]


This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.


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omaha tei presentation tangible property temporary regulations omaha, ne september 18, 2012 bryan...

Documents

deloitte development

unit of property

supplies definition

supplies issues

tangible property items

supplies inventories

return slide

temporary spare parts