A PRACTICAL GUIDE WITH THE FINAL TANGIBLE PROPERTY REGULATIONS. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> White Paper

Transcription

1 A PRACTICAL GUIDE TO COMPLYING WITH THE FINAL TANGIBLE PROPERTY REGULATIONS >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> White Paper

2 Introduction On September 19, 2013, the IRS issued the final tangible property repair regulations for Sections 162(a) and 263(a), which modified and superseded the temporary regulations issued on December 23, These regulations represent some of the most significant tax law changes to affect businesses since the 1986 Internal Revenue Code overhaul. 1 Impacting nearly every business, the regulations provide taxpayers with a broad range of guidance on whether to capitalize or expense amounts paid to acquire, produce, or improve tangible property. Compliance with the regulations is required beginning with the tax year that starts on or after January 1, To comply, most taxpayers will need to change their processes for accounting for repairs. Revising repair processes is not a trivial task as it requires taking a hard look at your tax and accounting systems and procedures and devising ways to ensure accuracy, enforce policies, reduce manual effort, and document facts and decisions. This white paper can help you plan and prepare for the process and system changes necessary for accurate and efficient compliance with the significant changes found in the tangible property regulations. You ll learn more about: Which repair processes are affected by the final regulations What types of changes need to be made to these processes How BNA Fixed Assets from Bloomberg BNA can help you comply effectively and efficiently The final regulations will affect all taxpayers that acquire, produce, or improve tangible property. Preamble to the regulations, IRS, September 19, 2013 The Final Regulations Provide Additional Guidance The final tangible property regulations have a long history. Following several court cases involving repair and maintenance expenses for fixed assets, the IRS proposed amendments to the regulations in The proposed amendments were revised, and re-proposed, several times during a period of seven years, allowing for significant feedback from the public. In 2013, the final regulations were published. Aug. 21, 2006 Proposed Amendments under Section 263(a) Dec. 27, 2011 Withdrew 2008 proposed regulations and issued temporary regulations May 9, 2012 Public Hearing on temporary regulations Sep. 19, 2013 Final regulations published Mar. 10, 2008 Withdrew 2006 amendments and proposed new regulations Jan. 1, 2012 Temporary regulations applied Nov. 20, 2012 Changed applicable date of 2011 temporary regulations to 1/1/14 Figure 1. History of Tangible Property Regulations Since New Tangible Property Regulations Impact All Business Owners, Tanya LaCosse, CPA, Nevada Business, August 8,

3 The final regulations provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses. They also clarify and expand earlier guidance issued in temporary regulations on acquiring, producing, and improving tangible property, including: De minimis rule change: The safe harbor ceiling has been eliminated Routine maintenance safe harbor extension: The 2011 regulations included a routine maintenance safe harbor for equipment; the final regulations expand earlier guidance and provide a routine maintenance safe harbor for buildings Changes for small businesses: A qualifying small business can elect to not apply the improvement rules to an eligible property based on certain limits Refined criteria for betterments and restorations: The definitions and criteria for betterments and restorations have been improved for greater clarity At the same time the final regulations were released, the IRS and the Treasury also released proposed regulations that revamp and simplify the rules for disposing of depreciable property under Code Sec. 168 (Modified Accelerated Cost Recovery System MACRS). While the proposed regulations contain many of the same property disposition rules as the 2011 temporary regulations, they revise the rules for dispositions and add new rules for partial asset dispositions. These regulations provide more guidance and clarity on a number of important issues; however, they don t reduce the effort that most companies must expend to start complying with the new rules. Most businesses will have to make one or more tax accounting method changes or elections to comply with these regulations. In addition, the IRS Large Business and International (LB&I) stand-down for auditing repairs and related dispositions will end starting in 2014, which means that most taxpayers will no longer have the option to defer compliance with the new rules. KPMG TaxNewsFlash, September 17, 2013 How The Regulations Impact Your Tax And Accounting Processes Beyond developing a strategy for when to take elections and filing Form(s) 3115 for change of accounting method with the IRS, another major component of complying with the final regulations is to ensure that your financial and tax accounting policies, processes, and software are revised accordingly. Despite the fact that the regulations were built on a foundation of existing case law and previously published guidance, taxpayers will still need to evaluate current capitalization policies and methods and update them to address the regulatory changes. For example, taxpayers are required to add an additional evaluation step to determine whether expenses for book must be capitalized for tax purposes. After importing all expenses and capitalized assets from the accounts payable or fixed assets subledgers of the financial accounting system, each asset or expense will need to be evaluated to determine whether it 3

4 is an expense or whether it needs to be capitalized for tax purposes. Once capitalized, it will be depreciated according to the governing tax policies. Figure 2 shows the additional step required in the data flow for expenses and assets. Import List of Repairs from A/P or Fixed Assets Subledgers Process to determine capitalization for tax purposes Identify the unit of property to be evaluated May not always apply if there was not an existing asset such as with adaptation or betterment Evaluate for Betterment, Restoration, Adaptation, and Safe Harbor Add Asset Associate with orginal asset Split Asset Capitalize Repair Dispose Asset Process within the fixed asset software Audit Trail Recognize Gain/Loss Figure 2. New Process for Compliance with Final Tangible Property Regulations When evaluating your current processes and systems for their ability to support and streamline compliance with the tangible property regulations, there are three major areas you should consider: Fixed Assets Data Flow To support the requirements for evaluating whether an asset or expense must be capitalized, the way you handle the data flow between accounting and tax may need to change. To support the additional evaluation step, you ll need to include assets and repair expenses in the data flow to the fixed assets tax subledger. You can then determine the unit of property impacted and evaluate for capitalization under the tax regulations or for safe harbor status. Can your current fixed assets system streamline the data flow process for you? BNA Fixed Assets facilitates the importing of expense and repair data from your financial accounting system(s) by allowing you to evaluate repair expenses to determine whether they should be capitalized under the tangible property regulations. Repairs can be accounted for by splitting the asset into its component parts, the disposal of the repaired portion, and the addition of the new portion. Classification and Capitalization of Improvements Other areas where you should re-evaluate your processes are classification and capitalization. Characterizing repairs within the payables process enables users to classify repair expenses that will be capitalized for tax purposes. For example, you could implement specific account codes that equate to types of repairs. 4

5 In addition, your systems need to enable tight association between the (new) improved asset and the existing asset(s). For instance, if a new roof is added to a building and capitalized as a separate asset from the building, the building should not be sold without also selling the roof. You ll need to evaluate whether your current fixed asset system can support these requirements. BNA Fixed Assets features a robust import capability that allows users to map the general ledger chart of accounts to depreciation policies, thereby automating the asset classification and setup policy. BNA Fixed Assets also allows for import of transaction data from the book fixed assets system or directly from accounts payable, thus supporting the import of all types of repair data. A detailed audit trail enables you to follow the flow of the asset throughout the repair life cycle for partial disposition of existing assets and for addition of betterment, restoration, or adaptation repairs. Application of Unit of Property The tangible property regulations use the concept of unit of property (UoP) as a basis for determining whether costs should be capitalized or deducted. Because the improvement standards in the regulations are applied at the building structure or building system level, it s critical when adding new property and setting up the asset that you ensure that the appropriate UoP is used. To do this, you ll need to create new rules that apply appropriately to each UoP. Your fixed assets system should enable you to create and enforce rules for applying UoP. It should also support splitting assets into appropriate units of property. Not only does BNA Fixed Assets support the processes you need around UoP, but as existing assets are broken into their units of property, BNA Fixed Assets maintains a detailed audit trail for the original and subsequent assets giving you greater accounting control. The final repair regulations contain provisions that may be beneficial for some taxpayers but unfavorable for others. PricewaterhouseCoopers LLP, September 18, 2013 A Roadmap To Implementing New Repair Processing As discussed in the previous section, your existing processes are impacted by the final regulations and need to be revised to enable compliance. Accomplishing this with a minimum of effort and disruption is undoubtedly every company s goal. To support that goal, here s an implementation roadmap (shown in Figure 3) that you can use to guide you through the effort: Step One: Clean Existing Fixed Assets Data To comply with the final regulations, it s best to start by reviewing and cleaning up your existing fixed assets data. a. Remove assets no longer in service (perform a physical inventory of assets if significant issues in accuracy exist) b. Review the subledger for correct depreciation policy or treatment of existing assets c. Split existing assets to reflect the proper UoP and value information where appropriate 5

6 Step Two: Build Repair Import Process Next, develop a mechanism to identify repairs. It could be as complex as developing specific account codes, or as simple as including a check box in your accounts payable system. You then need to create an import/export process from your accounts payable system into your fixed assets subledger. Automation of this process is critical to ensure fast and accurate processing while reducing manual effort. Step Three: Implement Audit Trail Tracking You need to ensure that facts and circumstances are well documented as part of the repair record. Include a copy of the accounts payable invoice, additional notes, and an automatic userid/ date/time stamp for all actions on your asset records. Step Four: Implement Repair Processing Now you re ready to revise your repair processes. a. Develop and document processes to dispose of converted portions of units of property as appropriate (this may be book-specific) b. Develop and document processes to capitalize new repairs and apply fact patterns of the parent asset c. Develop and document processes to ensure repairs are disposed or transferred with the parent asset 1. Clean Existing FA Data 2. Build Repair Import Process 3. Implement Audit Trail Tracking 4. Implement Repair Processing Figure 3. Implementation Roadmap for Repair Process Changes Evaluating Your Current Fixed Assets Software As you prepare to make the necessary repair process changes, you should also consider how well your existing fixed assets system supports the new processes. For instance, how many steps will be required to process a typical repair with your current system? How many of those steps are manual? The point of this exercise is to ensure you have a system that can automate as much of the repair process as possible and can enforce policies, ensure accuracy, and improve efficiency. The aim is to minimize manual intervention, maximize control, and provide a strong audit defense. How do you know whether your current fixed assets system or one you may be considering will support your company s need for compliance with the final tangible property regulations? One way is to start with the following checklist of features that specifically address efficient and accurate compliance: Automatically pulls data on expensed assets from the accounts payable system Easily imports both capitalized and expensed line items from the fixed assets or accounts payable subledgers Enables the set up of assets for all purposes (for both book and tax) based on the invoice data Supports automatic characterization of the assets based on the invoice data Allows for easy, what-if analysis and provides dynamic reporting capabilities 6

7 Provides strong accounting controls with limited user intervention Supports splitting existing assets into components Tracks the relationship between original (aggregate) asset and its components Provides a comprehensive audit trail for transactions Given the broad reaching impact of the regulations, if your software systems don t support the new processes and policies needed to comply, the amount of manual work required for compliance could be significant. Plus manual effort can result in errors that must be corrected later and which could cost the company additional taxes and penalties. If your current software doesn t provide the above functionality, it may be time to look for software that does. BNA Fixed Assets Helps You Streamline Compliance BNA Fixed Assets is an easy-to-use fixed assets software that enables tax and accounting professionals in companies of any size to more efficiently manage the complete fixed asset lifecycle. Designed to support both tax-only and book-and-tax use, BNA Fixed Assets lets you handle construction and acquisition through disposal while complying with regulations such as the final tangible property regulations. With BNA Fixed Assets, you get the essential capabilities you need to efficiently implement and manage the repair processes required for compliance with the final regulations, including: Automated import and set up of asset and repair data (see Figures 4 and 5) Documentation for repair treatment decisions, including an audit trail of all activities Automated repair processing steps Automatic, comprehensive reconciliation reporting ERP or Accounting System ::::::::::::::::::::::::::::::::::::::::::::::::::::::: General Ledger Accounts Receivable Accounts Payable Invoice Data Fixed Assets Subledger System of Record GAAP Calculations Monthly Export of Transaction Data BNA Fixed Assets G/L Integrator ::::::::::::::::::::::::::::::::::::::::::::::::: BNA Fixed Assets Web Import BNA Fixed Assets Web Import :::::::::::::::::::::: All Tax Calculations and Reporting Tax Compliance Systems :::::::::::::::::::: Transfers, Retirements, Repairs User Input Data Mapping, Validation, Reconciliation Figure 4. How BNA Fixed Assets Supports Data Flow for Repair Regulations (for Tax Only Usage) 7

8 ERP or Accounting System ::::::::::::::::::::::::::::: General Ledger Accounts Payable Posting File Trial Balance Invoice Data BNA Fixed Assets G/L Integrator ::::::::::::::::::::::::::::::::::::::::::::::::: Journal Entries BNA Fixed Assets Web Import BNA Fixed Assets Web Import :::::::::::::::::::::: System of Record All Calculations Tax Compliance Systems :::::::::::::::::::: Data Mapping, Validation, Reconciliation Transfers, Retirements, Repairs User Input Figure 5. How BNA Fixed Assets Supports Data Flow for Repair Regulations (for Book and Tax Usage) In addition, BNA Fixed Assets enables you to document and enforce your depreciation and amortization policies for the final regulations: Asset Type templates allow you to automate the enforcement and implementation of corporate policies when data is entered on improvements for units of property Auditable tracking mechanisms eliminate potential errors from misclassifying assets, support expense monitoring associated with tangible property, and automate the process of tracking partial disposals of repaired capital assets Gain/loss reporting provides documentation of allowable retirement gains/losses and enforces the use of your company s depreciation, amortization, and expensing policies With BNA Fixed Assets, you can maximize productivity, comply with GAAP rules and IRS regulations, and meet all of your financial and tax reporting requirements. I have always been impressed with [Bloomberg] BNA s ability to stay on top of the ever changing tax climate. I m certain that as soon as Congress acts there will be updates to [Bloomberg] BNA software. Mark Freedman, CPA 8

9 Conclusion Compliance with the final tangible property regulations can be complex and will certainly require significant effort on the part of nearly every taxpayer. While no one looks forward to implementing major changes to their tax and accounting policies, the right software can ease the frustration and simplify the tasks involved. A robust fixed assets system, such as BNA Fixed Assets, can support the final regulations, and mean the difference between an error-prone, manual set of new steps and a streamlined, automated repair process. With BNA Fixed Assets, you can handle the most demanding regulatory tax, accounting, and reporting requirements with ease. About BNA Fixed Assets With BNA Fixed Assets from Bloomberg BNA, it s easy, efficient, and cost-effective for companies of any size to manage the complete fixed assets lifecycle from purchase to retirement saving you time and money while ensuring accuracy. Bloomberg BNA s renowned tax expertise is built right into the software it s like having a tax expert at your side, providing the most up-to-date, comprehensive insight into the latest accounting rules and regulations. Our unique validation engine enforces compliance with tax regulations and GAAP rules, automatically ensuring accuracy. Even novice users can correctly and easily use the software without compromising accuracy. BNA Fixed Assets delivers all the capabilities of a robust fixed assets management system and grows with you as your business matures. Whether your company has tens, hundreds, or thousands of fixed assets, there s a BNA Fixed Assets solution designed to meet your needs and budget: Desktop Designed for a single user, it s powerful, but easy-to-use Server For multiple users within the same company Web-hosted Powerful, secure, anytime, anywhere access with no software to install or maintain 9

10 About Bloomberg BNA s Software Products Bloomberg BNA offers expert software products for tax and accounting professionals. With category-leading software and top-rated technical support, we are the solution of choice for professional firms and corporations of every size. More than 70,000 customers, including the IRS, depend upon Bloomberg BNA s software products for the highest degree of tax, regulatory, and compliance expertise available in the market. About Bloomberg BNA Bloomberg BNA, a wholly owned subsidiary of Bloomberg, is a leading source of legal, regulatory, and business information for professionals. Its network of more than 2,500 reporters, correspondents, and leading practitioners delivers expert analysis, news, practice tools, and guidance the information that matters most to professionals. Bloomberg BNA s authoritative coverage spans the full range of legal practice areas, including tax & accounting, labor & employment, intellectual property, banking & securities, employee benefits, health care, privacy & data security, human resources, and environment, health & safety. Though intended to provide accurate and authoritative information, this publication is provided with the understanding that it does not constitute tax, legal, accounting, or other professional advice or service. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Bloomberg BNA. For more information call (select option 3), contact your local Bloomberg BNA Representative, or visit South Bell Street, Arlington, VA, BNA Software, a division of Tax Management Inc. All rights reserved. FA002-WH rc 10