After you become an Enrolled Agent, one of your annual rituals with business owners is identification of capital assets. Explaining what purchases require depreciation and which are allowed as immediate tax deductions is a never-ending challenge. Describing depreciation rules is already difficult and it’s about to become more troubling.
Understanding tangible property rules is a continuous struggle for taxpayers. So, they typically leave determinations to their tax professionals. Consequently, absorbing unfolding interpretations about tangible property is a crucial element of annual EA CE courses.
The proper tax treatment for expenditures on property is a subtle and confounding matter. Just when you think that you’ve learned enough about it by passing the Enrolled Agent examination, the IRS introduces new factors. These affect many types of taxpayers, including those with business interests and investors in rental property. All of them are counting on you to know the difference between a deductible expense and a capitalized asset.
The latest depreciation rules were introduced in December 2011. They are applicable to tax returns starting with the 2012 tax year. If you missed the reports about this new guidance, now is the time for an updated Enrolled Agent course. The revised regulations apply to all acquisitions, production, and improvements to tangible property. Tax treatment for materials is also impacted.
The new depreciation guidance is only temporary. Finalization is anticipated in 2013. This follows many years of contentious debate going back to 2006. No wonder taxpayers are confused. Apparently, even the community of tax professionals was confused. The IRS withdrew initial proposed regulations after a public comment period. A second version in 2008 met the same fate. However, the third attempt seems destined for final acceptance – although this was expected in 2012, rather than 2013.
For now, the temporary regulations are valid until the beginning of 2014. These rules require taxpayers to capitalize expenditures more often than they prefer. Common situations where the provisions are applicable include such costs as fixing a broken window or repairing a leaking roof as well as purchases of furniture, computers, and even components of such property.
Replacing structural components of buildings, such as alarm systems and plumbing, present especially complex issues. Expect to expand your knowledge about unit of property definitions and de minimis purchases. Most businesses will need to alter their capitalization practices and accounting procedures based upon your input.
A note of fair warning to all Enrolled Agent tax professionals is that the final regulations will probably contain some changes to the temporary regulations. Prepare now to digest further effects on the de minimis rule, asset dispositions, and safe harbor deduction of maintenance expenditures.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.