Pub. 1 2012 Issue 2

26 San Diego Dealer S ince 2004, the Internal Revenue Service (IRS) has worked to issue regulations that address a fundamental tax question: Should a cost related to tangible property be capitalized or expensed? Such a simple question had led to much confusion and controversy between the IRS and taxpayers, so in late 2011 the IRS attempted to remedy the problem, issuing temporary regulations that address the issue. The regulations are here, they’re effective for 2012, and all taxpayers with tangible property need to address them. To help you understand the new regulations, let’s examine some frequently asked questions. Will the new tangible property regulations apply to my store? The regulations affect all dealerships, since they apply anytime tangible property is acquired, depreciated, improved, or disposed of and regardless of a taxpayer’s size, industry, or entity type. They apply to property that a taxpayer either owns or leases. Given that these new regulations likely affect my dealership, what key changes should I be aware of? The new rules cover a number of areas, including: Materials and supplies. The regulations contain a specific definition of the term materials and supplies and detail a number of optional accounting methods or annual elections related to materials and supplies. This may change the way dealerships account for items such as lube or fuel. Property improvements. At the heart of the regulations are rules for assessing whether costs must be capitalized as improvements or deducted as repair expenses. Generally, costs resulting in the betterment, restoration, or adaptation of a unit of property must be capitalized. This will change the way you approach what may have previously been repairs to your store, and you’ll need to look carefully at any upgrades you make. Routine maintenance safe harbor. The regulations contain a safe harbor applicable to certain costs associ- ated with personal property, such as cleaning and maintenance. If you meet the requirements for using the safe harbor, this rule allows you to immediately deduct these costs as repair expenses. Dispositions. The regulations govern when you must account for dispositions of prop- erty. As a result, if you fail to deduct the basis of a structural component of a building (such as an HVAC or security system) in the correct year, you could lose the deduction entirely. To which taxable years do the new regulations apply? The tangible property regulations are effective for tax years beginning on or after January 1, 2012, so you generally need to apply the new rules to any assets acquired or produced beginning in 2012. Also, if you need to change your dealership’s accounting methods to comply with the regulations, you may need to consider the effect of the regulations on transactions that occurred in prior years. When does my dealership have to comply with the regulations? Although the effective date for these regulations is January 1, 2012, the IRS has granted taxpayers a two-year window to automatically make the accountingmethod changes necessary to comply with these rules. During this window you canmake the appropriate method changes without the application of certain scope limitations that normally apply to automatic method changes. In addition, the IRS won’t generally engage in any audit activity related to these changes during this two-year period. How can my dealership correctly apply these rules and take full advantage of any opportunities they create? You’ll need to examine your current taxmethods of accounting for materi- als and supplies, property acquisitions and dispositions, improvements, and repair expenses. Inmany cases these methods will likely be the same ones used for your financial statements. You must then compare your current methods with those available under the new regulations. After making this assessment, you’ll need to make the appropriate accounting method changes. Sid Tobiason has over 30 years of experience providing tax and succession guidance to closely held dealerships and their owners. He can be reached at (858) 627-1448 or sid.tobiason@mossadams.com . New IRS Rules for Repairs and Upgrades to Your Stores BY S I D TOB I ASON, PARTNER, MOSS ADAMS L LP Arvind Balaraman / Shutterstock.com Did You Know...