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Understanding New Changes to Tangible Property Regulations

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Information about Understanding New Changes to Tangible Property Regulations

Published on June 1, 2016

Author: Lugenbuhl

Source: slideshare.net

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1. As tax return preparers know, tax season never truly ends. That promises to be the case for 2016, after the latest round of changes for tangible property regulations. Many Lugenbuhl clients are likely to be affected by some of the key amendments. Keep in mind, however, that the changes are numerous and go far beyond those summarized in this presentation. The volume of changes underscores an even greater need for tax preparers to ready themselves. UNDERSTANDING: New Orleans: 601PoydrasStreet,Suite2775 NewOrleans,LA70130 Phone: (504)568-1990 Fax: (504)310-9195 Website: www.lawla.com Thecontentofthispresentationdoesnotconstitutelegaladvice. Houston: 815WalkerStreet,Suite1447 Houston,TX77002 (713)222-1990 (713)222-1996 www.lawla.com Baton Rouge: 9311BluebonnetBlvd.,SuiteA BatonRouge,LA70810 (225)291-1990 504)310-9195 www.lawla.com NEW CHANGES TO 
 TANGIBLE PROPERTY REGULATIONS

2. Tangible property regulations, or TPRs, determine whether expenses for assets should be capitalized under the rules of Section 1.263(a)-1, -2, or -3, or written off under the rules of 1.162-3 or -4. The IRS issued the rules in 2006, and has been responsive to several opportunities over the years for public comment. The rules were reissued in 2008 and changed several more times, either on a temporary or permanent basis. Lugenbuhl shareholder Cassie Felder, a veteran of corporate/business law, commercial litigation, estate planning, tax planning and tax litigation, details a few key issues that are likely to impact 2016 corporate tax filings. Thecontentofthispresentationdoesnotconstitutelegaladvice. TANGIBLE PROPERTY REGULATIONS Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

3. Section 1.162-3 provides that expenditures for materials and supplies carried on hand should include the charges only in the amount that is actually used during the taxable year. What qualifies as materials and supplies: • Property used in the taxpayer’s operations and not acquired as part of a single unit of property; • Has a useful life of 12 months or less, starting when the property was used; • Costs no more than $100 to buy or produce; • Or is identified as a material and supply in future published guidance. In response to comments, the latest changes modify and expand the definition. They also: • Provide an alternative with handling rotable and temporary spare parts; • Allow certain materials and supplies to fall under the de minimis rule of 1.263(a)-2T; • Allow an election for capitalizing certain materials and supplies. Thecontentofthispresentationdoesnotconstitutelegaladvice. CHANGES TO TPRs: MATERIALS & SUPPLIES Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

4. THE H-B1 WORK VISA PROGRAM There’s also a new category for fuel, lubricants, water and similar items reasonably expected to be consumed in 12 months or less, beginning when they’re used in operations. Other changes create exceptions on safe harbor revenue procedures when treating certain property as materials and supplies. These exceptions might allow, for example, smallwares to be treated as materials and supplies, or small businesses to treat certain inventoriable items in the same manner as materials and supplies that are not incidental. Thecontentofthispresentationdoesnotconstitutelegaladvice. CHANGES TO TPRs: MATERIALS & SUPPLIES Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

5. THE H-B1 WORK VISA PROGRAM The 2008 rules allowed a taxpayer to deduct the cost of rotable spare parts when the parts are discarded. Alternatively, the taxpayer could elect to capitalize and depreciate rotable spare parts over the parts’ recovery period. But some public commenters complained that deferring the deduction until disposal was inconsistent with the method many taxpayers use. The latest rules were changed, therefore, to generally conform with the more common method — the cost of a new rotable part is deducted in the taxable year it gets installed. The taxpayer includes in income and assigns a cost basis equal to the fair market value of the used, nonfunctioning part and capitalizes the costs of repair. If the repaired part is used later, the basis of the part is deducted in the taxable year it gets reinstalled, and the cycle continues until the part is disposed. The earlier rule — deduction when the rotable parts are discarded — is still allowed as an alternative method. This can be used to treat the parts as used in the year in which they’re disposed of, or the taxpayer can elect to treat the parts as depreciable assets. If this method is chosen, it must be used for all of the taxpayer’s rotable and temporary spare parts in the same trade or business. Thecontentofthispresentationdoesnotconstitutelegaladvice. CHANGES TO TPRs: SPARE PARTS Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

6. The latest rules reflect regulators’ attempt to clarify whether the de minimis rule in 1.263(a)-2 can be applied to property that is also treated as materials and supplies under 1.162-3. Under the earlier rules, a taxpayer was not required to capitalize the cost of property if certain requirements were met. But some commenters complained that this essentially forced separate accounting for materials and supplies that qualified for the de minimis rule. Regulators agreed, therefore, to allow an election to apply the de minimis rule of 1.263(a)-2 to the cost of property that meets the definition of materials and supplies. The de minimis rule of 1.263(a)-2T(g) can be applied to the cost of any type of material or supply defined in 1.162-3T if the cost meets the requirements of the de minimis rule. In other words, the taxpayer can apply a single timing rule to any unit of property, including materials and supplies, to the extent the aggregate amount does not exceed the limit set in 1.263(a)-2T(g)(1)(iv). Thecontentofthispresentationdoesnotconstitutelegaladvice. CHANGES TO TPRs: DE MINIMIS RULE Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

7. Lugenbuhl shareholder Cassie Felder’s primary areas of practice include tax law, corporate and commercial transactions, estate planning, and litigation. With experience spanning multiple areas of business law, she has represented clients in real estate and commercial transactions, as well as facilitated mergers and acquisitions. She also has handled tax disputes against the Louisiana Department of Revenue and Internal Revenue Service. Learn more about Cassie’s career and experience, or visit our website to learn more about our firm’s expertise and services. Thecontentofthispresentationdoesnotconstitutelegaladvice. Phone: (504)568-1990 Address: Fax: 504)310-9195 601PoydrasStreet,Suite2775 Website: www.lawla.com NewOrleans,LA70130

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