Frequently Asked Questions Regarding Capitalization Versus Expense

What you should know about the Tangible Property Regulations

1. What exactly are the tangible property regulations?

§162 of the Internal Revenue Code allows you to deduct all the standard and necessary expenses you experience during the taxable year. This includes the costs of materials and supplies, repairs, and general maintenance.

The opposite of §162 is §263A, the Uniform Capitalization Rules (UNICAP).  §263A of the IRC requires you to capitalize the costs of acquiring, creating, or bettering tangible property, irrespective of the cost.

The tax law has always required you to reasonably determine whether expenditures related to tangible property are deductible business expenses under §162 or non-deductible capital expenditures under §263A.

Before the passing of the final tangible property regulations in September of 2013, your decisions on which way to go were directed by years of conflicting case law and IRS rulings.

The final tangibles regulations combined the case law and rulings into an “easy to understand” structure to help you determine whether certain costs are currently deductible or must be capitalized. To further simplify the decision process, the final tangibles regulations also contain several simplifying provisions that must be elected every year and are prospective. These are the de minimus safe harbor and the small taxpayer safe harbor. 

2. What is the effective date?

The final Tangibles property Regulations apply to taxable years beginning on or after January 1, 2014.

3. Do the final tangibles regulations apply to you?

“The final tangibles regulations under §263a (1-3) apply to anyone who pays or incurs amounts to acquire, produce, or improve tangible real or personal property”. IRS.gov.

These regulations apply to C corporations, S corporations, partnerships, LLCs, and individuals filing a Form 1040 with a Schedule C, E, or F.

The rules impact businesses with substantial real estate holdings.

4. When and how do you make an annual election for DMSH or STSH?

To make these elections, attach a statement for each individual election to your timely filed federal tax return, including extensions. Each statement should include your name, address, TIN, and a statement describing the chosen election. You must also file a statement every subsequent year.

This is important. The annual election is not a change in the method of accounting. So, no IRS Form 3115 is needed. 

5. Do the final tangibles property regulations apply to nonprofits?

The final tangibles regulations apply to all businesses subject to U.S. tax law. Period. Nonprofits that pay unrelated business income tax (UBTI) have taxable holdings or lost their tax-exempt status need to determine if a change to current tax methods is needed.

6. When and how do you change a tax method to use the final tangibles regulations?

You must get the IRS Commissioner’s consent to make any tax method change. The Treasury Department provides automatic consent for those who want to change to a method of accounting.

Generally, you receive automatic approval by completing and filing the long and complicated IRS Form 3115. 

The 3115 will identify the taxpayer, classify the method or methods being changed, identify the type of property, and will include a §481(a) adjustment, which is discussed in an earlier article. There is no fee for filing a method change with a specific designated change number.

As a side note, TPTM is the ONLY cost segregation firm to complete AND SIGN a Form 3115. If your cost segregation firm does not sign the 3115, YOU are responsible for the calculations. 

Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.