Capitalization of Tangible Property Expenditures

Capitalization of Tangible Property Expenditures

If you haven’t reviewed your company’s policy for the capitalization of tangible property expenditures in the last couple of years, you probably need to do so now. The IRS issued new Treasury Regulations for how to treat amounts paid to acquire, produce or improve tangible property. Although the regulations are temporary, we do not expect material changes from the current proposal.

New Regulations for Property Expenditures

These new rules are effective for tax years beginning on or after January 1, 2012, except for certain amounts related to materials and supplies and the de minimis rule which is effective for amounts paid or incurred before January 1, 2012. The new rules may result in a change in accounting method and the filing of Form 3115. Additional guidance is expected soon regarding automatic changes and the use of a cut-off period for certain items.

The new regulations also deal with the classification of a unit of property, repairs, rentals and leased property, acquisition costs, routine maintenance costs, improvement standards on buildings and structural components. Structural components will need to be tracked since any future repairs that can be capitalized will require the retirement of the old component.

Analysis: The new rules may mean big changes when accounting for improvements to nonresidential real estate. The new regulations could be troublesome for businesses that aggressively deducted repairs. The building improvement accounting rules will specifically impact the retail sector as they relate to store remodel costs.

These new capitalization rules are comprehensive and they will require a robust analysis of your company’s current policies and administrative processes for capturing such property additions and when to deduct future repair and maintenance costs. Save the date of Thursday, March 1, 2012 from 8:00 – 9:30 AM at our office. We’ll be providing you with more detailed information and updating you as additional guidance is published.