Tangible Property Regulations
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Money Saving Opportunities Through the Tangible Property Regulations
The Tangible Property Regulations (TPRs) provide guidelines for building owners to determine whether to expense or capitalize costs spent on property from 2014 forward.
If a building owner and their tax professional have not discussed the TPRs, the opportunities will be overlooked by both parties. Since 2013, CSSI has become a trusted resource for both clients and their tax professionals in this underutilized yet mandatory law.
The Tangible Property Regulations, under code section 263(a)(1-3), are the most significant tax change for real estate owners and investors since the Tax Reform Act of 1986. The repair regulations codify and define which expenditures on assets currently in service can be written down as an expense, and which ones need to be capitalized. The regulations also clarify confusion and are designed to reduce conflicts from previous court cases and regulations. They generally define which expenditures make an asset better and which ones keep the asset in its current operating condition.
Tangible Property Regulations - Expenditures
Unit of Property
Each building without connection to another building or structure is an individual unit of property. The definition of the unit of property (UOP) is critical to understand before any capital versus expense decisions can be made. If the taxpayer incorrectly identifies the UOP of their building, their capital versus expense decisions could be rendered incorrectly.
Once the unit of property is determined, buildings are broken down into building systems. Each building system must be accounted for within every building. A building is defined as nine systems, which are HVAC, Plumbing, Electrical, Escalators, Elevators, Fire Protection and Alarm, Security, Gas Distribution, and any other components identified in published guidance. Not every building will have all nine systems. For instance, a small warehouse may not have an escalator or elevator, but most have fire protection and security systems. CSSI includes a complete building systems breakdown including current depreciable and replacement cost with every study.
There are three Safe Harbors which allow certain expenditures to be expensed without scrutiny. Safe harbors are an administrative convenience, so a burden is not created for taxpayers on small items. The law is not interested in trivial expenditures.
- Is for expenditures under $2,500
- Is Latin for minimal things
- Is an annual election
- Can only be used in the current year
- The taxpayer must have an invoice to be able to take advantage of the DMSH. The invoice must show that each component is less than $2,500.
- For example, a computer that costs $2,400 would qualify for the DMSH. If the invoice includes shipping and installation and the total comes to $2,700, it will not be allowed under the DMSH.
- Taxpayers should ask the vendor to break installation and training out on a separate invoice so the DMSH will apply.
- This generally applies to all building components, but if the components are part of a larger renovation project, the DMSH is not allowed.
- Is an annual election
- Allows small taxpayers with average gross receipts under $10 million to be able to expense the lesser of 2% of the buildings on an adjusted basis or $10,000 on an annual basis.
- The safe harbor total dollar amount includes all expenditures from the DMSH. However, any expenditures done to the land improvement do not count towards the 2% or $10,000 limit.
- Is an often-overlooked safe harbor
- Allows for routine maintenance on an asset to be expensed.
- Is not an annual election, and all taxpayers are deemed to be already following the safe harbor.
- Routine maintenance is defined as any expenditure that under that is reasonably expected to be repeated within ten years. The one rule which must be followed is the expenditure cannot make the building component materially better, larger, or more efficient.
CSSI® routinely educates building owners and their tax professionals on how to use their Safe Harbors optimally.
Restoration, Adaptation, Betterment and Improvement (RABI) Rules
There are four tests that must be passed, assuming the Safe Harbors outlined above do not apply.
If the expenditure simply repairs a component and keeps it and its every day normal operating condition, assuming it is more than two years after occupancy, it generally can be expensed.
Partial Asset Dispositions
A partial asset disposition (PAD) is an annual election. When a building is renovated, and components are removed and disposed of, the remaining depreciable basis of those components can be expensed. This disposition can only occur in the current tax year. For example, a building put into service in 2018 and renovated in 2019, can only have the PAD taken in 2019, the same tax year as the renovation. Engineering-based cost segregation is a certain method for calculating PADs.
CSSI® offers continuing education opportunities for CPAs on the most recent tax law updates including Unit of Property declarations, the TPR Safe Harbors, RABI rules, and partial asset dispositions.
Learn More About the Tangible Property Regulations
For more information on a Tangible Property Regulations study, please contact us.