Tangible Property Regulations: Question and Answer 

    Published December 11, 2013

    The AICPA Tax Section created this page with Questions and Answers to help practitioners with the new rules related to Tangible Property Regulations.

    NOTE: This information is current as of Tuesday December 17, 2013.

    1. Whom do the new rules apply to?
    2. When do they apply?
    3. What do we need to do comply and can we just use the new rules going forward?
    4. Do we really need to file a Form 3115 or compute one or more Section 481(a) adjustment(s)?
    5. What is the de minimis safe harbor?
    6. How do we elect the de minimis safe harbor?
    7. Who makes the de minimis safe harbor election for an S Corporation and a Partnership?
    8. Who makes the de minimis safe harbor election for a consolidated group?
    9. What is considered an applicable financial statement (AFS) under the de minimis safe harbor? Does it include reviewed or compiled financial statements?
    10. We are a privately-owned company with no debt. As such, we do not spend extra money on an audit of our financial statements, and just have a review instead. How will this impact our choices under the final tangible property regulations related to de minimis safe harbor?
    11. Our company has an AFS and written book capitalization policy of $10,000. Are we limited to deduct $5,000 under the de minimis safe harbor? Do I need to change the threshold amount to comply with the new rules?
    12. Is a written book capitalization policy or procedure required under the de minimis safe harbor election?
    13. What is an acceptable written policy under the de minimis safe harbor?
    14. Our company has had a book capitalization policy of $1,000 for many years, and we follow it for tax purposes as well. The IRS has never examined us so our policy has not been subject of an IRS audit. Can we continue using the current policy? Or do we need to do some type of analysis of these rules?
    15. What is the risk(s) if we just keep doing what we have been for tax purposes and do not implement the new rules?
    16. We file a Schedule C (or Schedule E or F) with Form 1040 for our business operations. Our total gross receipts are less than $50,000 annually. Do the new rules apply to us?
    17. We have a written policy to expense an item costing $5,000 or less and an AFS. How do we apply the de minimis safe harbor election and material and supplies costing $200 or less?
    18. Can we continue to expense amounts paid for tangible property without making the de minimis election?
    19. How does the de minimis safe harbor rule interact with Section 263A?
    20. If amounts paid or incurred to repair or improve do not meet the improvement standards can we still deduct such costs as a repair regardless of the amount?
    21. What is the small taxpayer safe harbor?
    22. How does the small taxpayer safe harbor interact with the de minimis safe harbor and routing maintenance safe harbor?
    23. Do these rules apply to tax-exempt organizations?
    24. What is a general asset account (GAA)?
    25. What constitutes an improvement to tangible property?
    26. What constitutes a betterment to tangible property?
    27. What are some of the things that should be considered in determining if there has been a betterment to property?
    28. Does consideration need to be given to the type of replacement part or components in determining if a betterment has occurred?
    29. What constitutes a restoration to tangible property?
    30. Do the final regulations allow for any safe harbor methods for improvements?
    31. Do the final regulations provide simplified methods when determining if an expenditure is an improvement?
    32. I plan to replace a roof. Is it true that I could take a loss upon the disposition?


    1. Whom do the new rules apply to?

    The rules apply to all businesses that acquire, product, or improve a tangible property.
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    2. When do they apply?

    The new rules generally apply to taxable years beginning on or after January 1, 2014. You may retroactively apply the final regulations and make elections for taxable years beginning on or after January 1, 2012.

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    3. What do I need to do comply and can I just use the new rules going forward?

    You need to review your overall accounting procedure to determine if your current procedure complies with the new rules. If you are not in compliance with the new rules, you must file a change in method of accounting (Form 3115) to comply. 

    Additionally, the IRS expects to issue transitional guidance in the form of revenue procedures by the end of 2013 to assist taxpayers in complying with the new rules including taxpayers who adopted the 2011 temporary regulations.  Industry-specific guidance is also expected later 2014 (for example, cable network, natural gas, retail, and so on).

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    4. Do I really need to file a Form 3115 or compute one or more Section 481(a) adjustment(s)?

    A change to comply with the tangible property regulations generally constitutes a change in method of accounting to which the provisions of sections 446(e) and 481(a) apply. As a result, filing a Form 3115 and computing one or more Section 481(a) adjustment(s) are generally required. The soon-to-be-released revenue procedures will provide additional guidance.

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    5. What is de minimis safe harbor?

    It is an elective provision under the final regulations, which allows taxpayers to immediately deduct amounts paid to acquire, produce, or improve tangible property for tax purposes.  The safe harbor does not apply to inventory or land.

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    6. How do I elect the de minimis safe harbor?

    You must attach an annual election statement with timely filed original return including extensions.  The procedural guidance may provide more detailed information.  

    For additional resources, check out the AICPA’s quick summary of the final tangible property regulations.

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    7. Who makes the de minimis safe harbor election for an S corporation and a partnership?

    The S corporation and partnership, not the shareholders or partners, make the election.

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    8. Who makes the de minimis safe harbor election for a consolidated group?

    The common parent makes the election for each member of an affiliated group by attaching a statement, which includes the names and taxpayer identification numbers of each member electing the safe harbor.

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    9. What is considered an applicable financial statement (AFS) under the de minimis safe harbor? Does is include reviewed or compiled financial statements?

    A financial statement required to be filed with the Security and Exchange Commission (SEC), a certified audited financial statement accompanied by the report of an independent certified public accountant, and a financial statement required to be filed with a federal or state governmental agency qualifies as an AFS.  Thus, reviewed or compiled financial statements do not qualify as an AFS.

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    10. We are a privately-owned company with no debt. We do not spend extra money on an audit of our financial statements and just have a review. How will this impact our choices under the tangible property regulations related to the de minimis safe harbor?

    The final regulations apply to all businesses regardless of the size.  However, the final regulations provide a higher de minimis safe harbor limit for taxpayers with an AFS ($5,000 or less per item/invoice limit).  Taxpayers without an AFS have $500 or less per item/invoice limit.  As a result, please consult with your tax advisors regarding which rules applies to you. 

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    11. Our company has an AFS written book capitalization policy of $10,000. Are we limited to deduct $5,000 under the de minimis safe harbor? Do we need to change the threshold amount to comply with the new rules?

    If an item costs more than $5,000, no portion of the cost of the property will be covered under the de minimis safe harbor. However, you could still expense items exceeding $5,000 to follow the book policy for tax purpose but must show that such procedure clearly reflects income, according to the IRS. In other words, you could still follow the current book policy for tax purpose, if the de minimis safe harbor is elected.  As a result, changing the threshold amount to comply with the new rules is not necessary.

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    12. Is a written book capitalization policy or procedure required under the de minimis safe harbor election?

    You must have a written policy in order to apply the $5,000 or less per item/invoice limit. This policy must be in place at the start of the year for which the safe harbor election will be made. Such written policy is not required for the $500 or less per item limit. But you must establish that you have an accounting procedure to expense items costing $500 or less in place.

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    13. What is an acceptable written policy under the de minimis safe harbor?

    The IRS and Treasury did not provide additional guidance on how such written policy should be drafted. However, the final regulations do require that such written policy to be based on a specified dollar amount or useful life of 12 months or less and be established for a non-tax purpose.

    The AICPA developed a sample de minimis safe harbor written capitalization policy.

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    14. Our company has had a book capitalization policy of $1,000 for many years and we follow it for tax purposes as well.  We have never been examined by the IRS so our policy has not been a subject of an IRS audit.  Can we continue using the current policy or do we need to do some type of analysis of these rules?

    Reevaluating your overall accounting procedure and policy to determine whether or not your current policy is in compliance with the final regulations is highly recommended. However, you do not have to change your policy if it already meets the minimum requirement set forth in the final tangible property regulations. In addition, the final regulations provide that a change in accounting procedures is not a change in method of accounting.

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    15. What is the risk(s) if we just keep doing what we have been for tax purposes and do not implement the new rules?

    There is always an IRS audit risk. More importantly, your paid tax return preparer may be unable to sign your 2014 tax returns if you have not complied with the new rules.

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    16. We file a Schedule C (or Schedule E or F) with Form 1040 for our business operations and our total gross receipts are less than $50,000 annually. Do the new rules apply to us?

    The new rules apply to all taxpayers that acquire, produce, or improve tangible property (from large public corporations to self-employed contractors) regardless of gross receipts. There is a small taxpayer safe harbor that applies to buildings (more information provided at question 21 below).

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    17. We have a written policy to expense an item costing $5,000 or less and an AFS. How do we apply the de minimis safe harbor elections and material and supplies costing $200 or less?

    If the de minimis safe harbor election is made and materials and supplies are covered under that minimum capitalization policy, all materials and supplies costing $5,000 or less would be expensed to follow the written policy. However, certain materials and supplies may still need to be capitalized under section 263A (more information provided at question 19 below).

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    18. Can we continue to expense amounts paid for tangible property without making the de minimis election?

    Without the election in place, you must apply and comply with the general rules under respective sections in the final tangible property regulations and be able to support that your expensing policy clearly reflects income.

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    19. How does the de minimis safe harbor rule interact with section 263A?

    Items expensed under the de minimis safe harbor may still be required to be capitalized under section 263A. For example, if a taxpayer acquires a component part costing $500 for the taxpayer’s manufacturing equipment, the cost of the component part would be expensed. However, the component part is expected to be installed in the taxpayer’s manufacturing equipment used to produce property for sale, the taxpayer may be required capitalize the component part as an indirect cost of property produced under section 263A.

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    20. If the amounts paid or incurred to repair or improve do not meet the improvement standards, can we still deduct such costs as a repair regardless of the amount?

    If the nature of such repairs/improvements does not meet the improvement standards, the associated costs would be deducted as a repair regardless of the amount.

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    21. What is the small taxpayer safe harbor?

    It is an elective provision under the final regulations, which allows a qualifying taxpayer (with $10M of average gross receipts from the prior three tax years) not to apply the improvement standards for amounts paid for repairs, maintenance, improvements, and similar activities performed on the eligible building (with an unadjusted basis of $1M or less) for tax purposes.

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    22. How does the small taxpayer safe harbor interact with the de minimis safe harbor and routine maintenance safe harbor?

    A qualifying taxpayer electing the small taxpayer safe harbor can annually deduct amounts paid (up to $10,000 per building) for expenditures that otherwise be capitalized to eligible buildings.  However, the qualifying taxpayer must include the amounts not capitalized under the de minimis safe harbor election and routine maintenance safe harbor to the annual amount paid for repairs, maintenance, and improvements.  If the annual amount paid exceeds $10,000, none of the annual amount would be eligible under the small taxpayer harbor.

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    23. Do these rules apply to tax-exempt organizations?

    Yes, the final regulations apply to tax-exempt organizations in the same manner.

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    24. What is a general asset account (GAA)?

    A general asset account (GAA) allows taxpayers to group like-kind assets into a single category for depreciation purpose.  For example, rather than individually tracking 1,000 monitors, you could group them into a single category and depreciate the cost.  GAA generally provides a simplification for certain taxpayers.

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    25. What constitutes an improvement to tangible property?

    A taxpayer generally is required to capitalize expenditures paid to improve a unit of property. A unit of property is improved if any one of the following apply to the amounts paid

        • are for a betterment to a unit of property,
        • to restore the unit of property, or 
        • to adapt the unit of property to a new or different use.

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    26. What constitutes a betterment to tangible property?

    There is a betterment to tangible property if any of the following occurs

        • corrects a material condition or defect that either existed prior to the taxpayer’s acquisition of the property or arose during the production of the property, whether or not the taxpayer was aware of the condition or defect at the time of acquisition or production;
        • results in a material addition (including a physical enlargement, expansion, extension, or addition of a major component) to the property; or
        • is reasonably expected to materially increase productivity, efficiency, strength, or quality of the property or the output of the property.

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    27. What else should be considered in determining if there has been a betterment to property?

    The determination of whether a betterment has occurred is based on the facts and circumstances of the situation.  Factors to consider include the purpose of the expenditure, the physical nature of the work performed, and the effect of the expenditure on the property.

    To determine if a betterment has occurred, a comparison is made between the condition of the property immediately after the expenditure and the condition of the property immediately before the circumstance triggering the need for the expenditure. If the situation involves normal wear and tear, the comparison is made to the condition of the property either immediately after the last time the maintenance for wear and tear was performed or, if such maintenance has not previously taken place, when the property was placed in service by the taxpayer.

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    28. Does consideration need to be given to the type of replacement part of components in determining if a betterment has occurred?

    The final regulations stipulate that if a taxpayer is unable to obtain a comparable replacement part (for example, due to technological advancements or product improvements), the mere fact that the part is replaced with an improved part will not, by itself, cause the expenditure to be treated as a betterment of the property.

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    29. What constitutes a restoration to tangible property?

    Expenditures are considered a restoration if  

        • it is for the replacement of a component of the property and the taxpayer has properly deducted a loss for that component (other than a casualty loss),
        • it is for the replacement of a component of the property and the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component,
        • it is for the repair of damage to a property for which the taxpayer has properly taken a basis adjustment as a result of a casualty loss or relating to a casualty event,
        • it returns the property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use,
        • it results in the rebuilding of the property to a like-new condition after the end of its class life, or
        • it is for the replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a property.

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    30. Do the final regulations allow for any safe harbor methods for improvements?

    In addition to the small taxpayer safe harbor above, the final regulations provide a safe harbor for routine maintenance on both real and personal property. The safe harbor allows taxpayers to treat routine maintenance costs as currently deductible and not an improvement to tangible property. To be considered routine maintenance, the taxpayer has to expect to perform these services more than once during the class life of personal property. For eligible building property, the routine maintenance must occur twice over a 10-year time frame. Routine maintenance includes inspecting, cleaning, and testing a property and replacing parts of the property with comparable and commercially available and reasonable replacement parts.

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    31. Do the final regulations provide simplified methods when determining if an expenditure is an improvement?

    The final regulations do not provide such a simplified method. However, the final regulations allow a taxpayer to elect to treat the amounts that are capitalized for financial reporting purposes, as an improvement for simplification. This election eliminates an analysis of those costs to determine if they would have been properly classified as a repair and maintenance expense under the final regulations for tax purpose (note that this election does not cover amounts that were deducted as a repair and maintenance expense for financial reporting purposes).

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    32. I plan to replace a roof. Is it true that I could take a loss upon the disposition?

    The proposed regulations allow a taxpayer to elect to dispose of a component of an asset (for example, roof). Therefore, taxpayers can use a reasonable method to determine the net basis of the replaced asset. Under the improvement rules, the new roof would be required to be capitalized unless one of the safe harbor methods (for example, small taxpayer and routine maintenance safe harbors) is elected.  

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