Tax Time: Know Your “Tangible Property Regulations”

By Chris Morse

There’s a good chance you haven’t heard of the IRS’ issuance of tangible property regulations, also known as “repair regulations.” When it comes to tax matters impacting your business, it’s likelier that the Affordable Care Act has received more of your attention.

Overlooking the final repair regulations, however, would be a mistake. If you’ve acquired, produced or improved tangible property, you need to know what the impact is on your business and what your next steps should be. First off, it helps to know what is considered “tangible property.” To help you get up to speed with repair regulations as we enter tax season, here is a compilation of five things you should know:

CAN YOU CARRY IT?

One way to think about it is if you can carry it, it might apply. So work computers, desks and chairs fall into this category.

CAN’T CARRY, BUT …

Some equipment far too large to carry also qualifies, such as machinery, leased equipment and even signs. Noticing a pattern? If the property in question is necessary for you to conduct business, there’s a good chance it qualifies.

PROPERTY IMPROVEMENTS

Tangible property also refers to improvements made to buildings and manufacturing plants you own. For example, if you’ve repaired a bank of elevators in one of your properties, that qualifies. Other improvements/changes that qualify: HVAC systems, plumbing and electrical systems and security systems.

THE GOOD NEWS

It’s rare that “good” and “tax” are used in the same sentence, but the new regulations help clear up a lot of issues that caused taxpayers frustration in the past. The new regulations contain several new elections – ways to deduct or capitalize your expenditures – and are considered “taxpayer-friendly.” That’s code for, “You might realize notable financial benefit as a result of the new regulations.”

SEEK HELP

We’re way beyond 1040EZ here. While some view these changes as friendly, the myriad – and sometimes byzantine – considerations you’ll have to make in leveraging the final regulations can seem far less than friendly. Fortunately, just as you don’t need to know how the internal combustion engine works in order to know when to take your car into the shop, you don’t need to understand or memorize tax code. Instead, meet with your tax advisor about the repair regulations as soon as possible so you both can be prepared to take advantage of any possible beneficial deductions or capitalizations.

A possible scenario

To better illustrate how repair regulations might affect you, let’s conduct an interview with a local (fictional) businessperson – a dentist working in Acme.

Dentist: “I treat patients all day. Do the new repair regulations apply to me?”

Tax Advisor: “They do. For example, the dental implants you use for patients apply as tangible property. Also, do you own the building where your practice is located?”

Dentist: “Yes. Do these final regulations apply in that situation?”

Tax Advisor: “It depends. Did you make any improvements to the building?”

Dentist: “I improved the entryway, yes.”

Tax Advisor: “Then we should definitely talk about repair regulations and how they will impact you.”

There are literally thousands of possible variations on such conversations, but this scenario hopefully gives an idea of how and why the final repair regulations need to be on your radar.

Chris Morse is a principal at Rehmann and director of the tax department in Traverse City. His experience includes providing accounting, tax, financial planning and business consulting services to family-owned and closely-held businesses, their shareholders and officers. He can be reached at chris.morse@rehmann.com.

 

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