Time is running out for taxpayers to implement the new tangible property regulations. The new rules must be followed beginning in 2014. All taxpayers with tangible business and investment property will need to analyze current accounting practices and potentially institute changes to conform to the new rules.

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May 2014
Opportunities and Obligations under the
Tangible Property Regulations
Time is running out for taxpayers to implement the new tangible property regulations. The new rules must be
followed beginning in 2014. All taxpayers with tangible business and investment property will need to analyze
current accounting practices and potentially institute changes to conform to the new rules. Many taxpayers
can leverage the final regulations to increase and accelerate tax deductions. Others may have to defer or
recapture deductions as a result of the new rules. And given that many of these rules simply didn’t exist a
couple of years ago, virtually all taxpayers with tangible property will need to request one or more accounting
method changes on their 2014 tax returns to become compliant.
Opportunities under the Tangible Property Regulations
The determination of whether an expenditure had to be capitalized and recovered over several years or could
be deducted immediately has always been a point of contention between taxpayers and the IRS. The
Treasury Department has attempted to resolve some of these conflicts by implementing new rules that refine
and clarify definitions and that simplify determinations by introducing several safe harbors.
Partial Disposition Election – Historically, when a taxpayer replaced a significant component of an asset --
such as the roof of a building, an elevator, an HVAC unit, etc. -- the taxpayer had to continue to depreciate the
old asset as well as the new replacement. Under rules proposed last fall (expected to be finalized this summer
with few modifications), taxpayers can now make an election to write off the undepreciated cost basis allocable
to the replaced component, presuming the cost of the replacement component is capitalized. And the IRS has
provided generous methods for backing in to the cost basis of the replaced asset. Taxpayers that disposed of
a significant portion of an asset in previous years can make a late partial disposition election via an automatic
accounting method change request to recover the undepreciated basis. The ability to make a late partial
disposition election is not expected to be available after 2014.
De Minimis Safe Harbor Election – As a practical matter, virtually every business has a capitalization policy
(formal or informal) by which it immediately writes off expenditures under a certain cost threshold. The IRS
has never officially condoned such a business practice – until now (within limits). Any taxpayer with an audited
financial statement and a written capitalization policy in effect as of the first day of the year can elect to
immediately deduct expenditures under that book policy up to a limit of $5,000 per item or invoice. A taxpayer
without an audited financial statement can elect to deduct expenditures under its accounting procedures (which
are not required to be written) up to a limit of $500 per item or invoice. For some taxpayers, making the de
minimis safe harbor election simply protects from audit scrutiny the amounts they had been previously
deducting. For taxpayers without a capitalization policy, or that had policies with thresholds below the
$500/$5,000 limits, the de minimis safe harbor election provides an opportunity to increase tax deductions if
they modify their accounting practices accordingly.

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Routine Maintenance Safe Harbor – Some taxpayers may have historically capitalized routine maintenance
activities, perhaps because of the size of the expenditures. Taxpayers that adopt the routine maintenance safe
harbor accounting method can deduct certain maintenance activities, such as cleaning, testing, inspecting and
replacing worn parts, as long as the activities are expected to be performed more than once during the asset’s
depreciable class life (or within a 10 year period in the case of a building). The routine maintenance safe
harbor may simply provide peace of mind upon examination, or, for taxpayers who have been too conservative
in their capitalization practices, it may generate additional deductions by allowing them to write off the
unrecovered cost of routine maintenance activities that were capitalized in prior years.
Small Taxpayer Safe Harbor Election – In an attempt to simplify small taxpayers' compliance with the rules
pertaining to capitalization of building improvements, the final tangible property rules add a new safe harbor for
taxpayers with gross receipts of $10 million or less. Qualifying small taxpayers can elect not to capitalize
improvements to a building with an unadjusted cost basis of $1 million or less if the total amount paid during
the year for repairs, maintenance and improvements does not exceed the lesser of $10,000 or 2% of the
unadjusted cost basis of the building. The safe harbor is elected annually on a building-by-building basis. As
with the de minimis safe harbor election, the small taxpayer safe harbor election may generate additional tax
deductions for some taxpayers, while simply protecting from scrutiny amounts already deducted by other
taxpayers.
Obligations under the Tangible Property Regulations
Unfortunately, not every aspect of the new tangible property regulations will yield increased tax deductions
upon adoption. Some could produce either more deductions or the recapture of previously taken deductions,
depending on prior accounting practices. Others may not impact current deductions significantly, but
nonetheless are required to be implemented and thus will require some analysis and some additional
disclosures with the taxpayer’s 2014 tax return.
Materials and Supplies – The basic rules governing materials and supplies have not substantially changed –
non-incidental materials and supplies must be deducted in the year consumed while incidental materials and
supplies (for which no inventory is maintained) are deducted in the year purchased. What has changed is how
materials and supplies are defined – expanded to include property with an acquisition cost of $200 or less.
Since this definition did not exist under the old rules, generally all taxpayers will need to adopt an accounting
method change to conform to the new definition of materials and supplies. Even if the taxpayer has adopted
the de minimis safe harbor, which includes materials and supplies, the taxpayer should still adopt the new
materials and supplies definition as a protective measure, given that the de minimis safe harbor is an annual
election. Fortunately, the accounting method change to adopt the materials and supplies definition is applied
on a going forward basis so the taxpayer does not need to assess whether materials and supplies incurred in
prior years have been treated appropriately under the new definition.
Improvements – At the heart of the final tangible property regulations are rules to determine whether an
expenditure constitutes an “improvement” to an asset (which would then need to be capitalized) because it
resulted in a betterment, restoration or adaptation of the property. Since these standards did not exist
previously, the requirement to follow the new standards necessitates adopting an accounting method change.
Unlike the method change for materials and supplies, the new improvement standards must be applied
retroactively. This means that the taxpayer will need to review expenditures in prior years to evaluate whether
their treatment conforms to the new standards. A decision to deduct expenditures in a prior year, where the

3. improvement standards suggest capitalization, would require the taxpayer to recapture some of that
deduction. Conversely, a decision to capitalize expenditures in a prior year, where the improvement standards
suggest deducting, would enable the taxpayer to write off the undepreciated cost of those expenditures. Even
if all prior year decisions happen to comply with the new standard, an accounting method change to adopt the
new standard is required, given that it didn’t previously exist (even if no additional deductions or income
recapture would result).
Conclusion
As complicated as these new rules seem, this discussion only contemplates the most common issues that
taxpayers will face as they implement the new tangible property regulations. With time running out, taxpayers
should act quickly to assess the actions required to comply with the rules. For more information on the
tangible property regulations and how they impact your business, consult your local CBIZ MHM tax advisor.
Also, see the links below to previous CBIZ MHM articles for additional information.
• Updated Tangible Property Rules Expand Safe Harbors, Disposition Rules
• IRS Issues Implementation Guidance on Tangible Property Regulations
• New Tangible Property Guidance Allows Late Partial Disposition Elections
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