Tangible Property Capitalization Update

Tax Professionals' Resource
May 16, 2013 — 1,797 views  
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The IRS has issued a recent update on rules in context of tangible property capitalization. Accordingly, dates for tangible property examinations have been extended. The new guidelines are for taxpayers who are business owners with fixed assets. In order to comply, they will have to change their method of accounting, which is 481(a) adjustment.

What's the Change?

The new changes include the costs associated with the acquisition of tangible property. These costs include shipping and transportation costs, investigation and facilitation costs along with appraisal, broker fees, as well as engineering studies cost. If a property is being used, the expenditure is capitalized.

The costs incurred in repair or improvement of the tangible property is capitalized. New definition of supplies and materials expands them. Additionally, buildings and their components are broken down into 9 structural components for taxation. The taxpayers have the advantage to claim losses on buildings. But the taxpayers will find it difficult to deduct repair costs.  

Examination Instructions for Jan 1, 2012 to Jan 1, 2014

Modified tangible property examinations guidelines, according to the latest IRS update, have been issued to their personnel. The tax years included is from January 1, 2012 to January 1, 2014. There is a likelihood of taxpayers changing their accounting methods for repair regulations. Alternatively, there is also a possibility that accounting methods have not been changed by the taxpayers.

For the aforesaid tax years, according to the IRS explanation, if the accounting method is changed the examiner will carry out risk assessment for the changed accounting method. Alternatively, if the taxpayer has not brought about changes in their accounting method, the examiner will not examine this issue.  

Examination Instructions for Taxpayers Before Jan 1, 2012

Tangible property will not be examined under the current exam for taxation period before January 1, 2012. Whether the costs involved in improving, replacing, or maintaining the tangible property should be capitalized as it is not the current exercise for the period before Jan 1, 2012 tax years. Similarly, issues pertaining to tangible assets depreciation or involving structural parts of the building is currently out of purview.

The earlier IRS instructions in respect to tangible property before 1st Jan, 2012 remain the same. The examiners have been instructed to withdraw some parts of forms 4564 relating to these issues. All forms 5701 are withdrawn along with the adjustments proposed. A new form is to be issued along with form 886-A. The tax year has the time frame of two years to adopt new accounting methods, beyond which they may be subjected to examination from 1 January, 2014.    

Examination for Tax Years after Jan 1, 2014

Tangible property examinations protocols followed will be normal after the first of January, 2014. The agents are expected to follow the regulations and procedures based on normal protocols. Adjustments under 481(a) covers risk assessment. In performance of this task, they will examine if the adjustments are properly accounted for acquisition, production, or improvement of the tangible property as computed under the previous method.  

Previous tangible property deductions were made under section 162. Further, the agents will also be considering if section 481(a) adjustments were taken into account. The accuracy of adjustments under section 481(a) will also be subjected to scrutiny. 

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