Who is Required to Follow the Tangible Property Regulations?
Passed in 2013, the Final Tangibles Property Regulations apply to all taxpayers who own tangible property. Tangible property is described as anything that can be touched, includes both real and personal property, and is the opposite of intangible property.
Also, if tangible property is created, purchased, repaired, renovated, or improved, the Tangible Property Regulations apply and are MANDATORY as of January 1, 2014. These regulations apply to pass-through entities as well as C Corporations and individuals who file a Form 1040 with a Schedule C, E, or F.
Background Information
The IRS and Treasury began an endeavor in 2004 to modernize and clarify regulations that determined if expenditures on in-service assets, especially buildings, need to be capitalized or expensed.
The Service and taxpayers were in constant disagreement, which led to court battles over whether expenditures on tangible property (including buildings) are deductible as an expense or must be depreciated. The confusion between what a deductible repair is and what a capital improvement is has typically been settled through costly and time-consuming court cases. The case law precedents were (and still are) primarily based on timing as well as the facts and circumstances of the repair, renovation, or improvement.
To reduce disagreements with savvy CPAs, Tax Attorneys, and taxpayers, the IRS issued the final regulations in September 2013. These are commonly referred to as the “repair regulations” and provide rules regarding the management of expenditures for acquiring, sustaining, or improving tangible property. The repair regulations consist of over one hundred examples, and the facts and circumstances of each expenditure MUST be matched with the best possible example—ESPECIALLY expenditures on buildings.
Thus, the Tangible Property Regulations are critically important for businesses with substantial real estate holdings as well as single-family rentals filed on Schedule C.
If the Tangible Property Regulations are ignored, the IRS can disallow the expense or the depreciation of expenditures (under §1016-3). Disallowing an expense because it should have been depreciated requires no further explanation. Disallowing a depreciated expenditure because it should have been expensed is very odd, but it is a real possibility. Under §1016-3, which are referred to as the use it or lose it rules, can result in the disallowance of all future depreciation of that expenditure or asset. Disallowing an expense or depreciated asset will result in fines, interest, and underpayment penalties.