Expense vs Capitalize? Tangible Property Regulations

On Demand Webinar

Webinar Details $219

  • Rated:
  • Webinar Length: 100 Minutes
  • Guest Speaker:   Chuck Borek
  • Topic:   Taxation and Accounting
  • Credit:   CPE 2.0, ATATX 1.5
All Access Membership

The question is not “what is new?” but “what is not new?”

The world of acquiring, repairing, renovating, and improving a building has changed. In 1986, dividing a building into its various components was “out-lawed.” As time went by, building owners were able to have Engineering Studies performed and values were assigned to various components of the building for depreciation purposes.

The IRS has finalized their Tangible Property Regulations and we have NEW RULES. Instead of components, we have “Building Systems” and “Units of Property.”

Those persons/companies that acquire or build improvements on real estate may have elections to make, and new definitions for the improvements, renovations, adaptations, and betterments of their buildings.

Which brings us to the new rules on when an amount may be expensed or is required to be capitalized.

In this course you will learn the definitions of:

  • Betterment
  • Restoration
  • Adaptation
  • Maintenance vs. Improvements
  • Repairs

Included are discussions on:

  • Building Systems
  • Unit of Property
  • Elections
  • Safe Harbors

Learning Objectives: 

  • When building a building, how to separate the costs between Building Systems.
  • If a change to a Building System is a cost to be expensed or is required to be capitalized.
  • If a change to a Unit of Property is a cost to be expensed or is required to be capitalized.
  • What elections are still available to you?
  1. Introduction
  2. § 162: Ordinary $ Necessary 00:07:15
  3. Note: Election Available 00:08:28
  4. § 263: No Deduction For: New Buildings/Improvements 00:10:39
  5. The Landscape 00:12:10
  6. The BAR Exam 00:13:31
  7. Betterments 00:14:49
  8. Adaptions 00:16:06
  9. Restorations 00:16:39
  10. Definition of Major Component 00:19:29
  11. Definition of Substantial Structural Part 00:21:13
  12. Burden Always on the Taxpayer 00:23:31
  13. Improvement or Repair? 00:25:38
  14. Improvement or Repair? 00:27:03
  15. Unit of Property 00:29:06
  16. Non-Buildings 00:29:37
  17. Buildings 00:33:32
  18. De Minimus Safe Harbor 00:35:02
  19. The De Minimus Safe Harbor Truce 00:38:39
  20. Safe Harbor Requirements 00:40:35
  21. Safe Harbor Carve-Outs 00:42:05
  22. De Minimus Safe Harbor Election 00:44:01
  23. Election Statement 00:44:39
  24. Small TP Building Improvements 00:45:27
  25. Small TP Building Improvements - Unadjusted Basis 00:46:02
  26. Small TP Building Improvements: Lessees 00:47:20
  27. Small TP Building Improvements: “Small Taxpayer” 00:48:13
  28. Small TP Building Improvements: 2 Restrictions of Note 00:48:50
  29. Small TP Building Improvements: Attach Statement 00:49:51
  30. 179 Deduction 00:50:44
  31. Four Types of Code § 179 Property 00:53:05
  32. Expanded Coverage 00:50:44
  33. Non-Qualifying Property 00:54:48
  34. Purchased and Placed in Service Requirement 00:55:37
  35. Business Use 00:57:13
  36. Recapture 00:59:19
  37. Recapture Example 01:00:06
  38. Recapture Example Cont’d 01:01:10
  39. No § 179 Deduction for Cars 01:02:43
  40. $25,000 § 179 Deduction for SUVs 01:02:53
  41. Heavy SUVs 01:03:09
  42. Non-SUV’s 01:03:34
  43. Bonus Depreciation 01:05:17
  44. Elements of Cost Segregation Study 01:06:13
  45. Elements of Cost Segregation Study 01:09:00
  46. Elements of Cost Segregation Report 01:09:36
  47. Organizational Costs 01:10:53
  48. Start-Up Costs 01:11:29
  49. Organizational and Start-Up Expenses - General Rule 01:12:02
  50. Organizational and Start-Up Expenses 01:12:28
  51. Organizational Costs 01:13:02
  52. Start-Up Costs 01:13:32
  53. Non-Qualifying Costs - Corps 01:14:12
  54. Example 01:15:27
  55. Example Con’t’d 01:16:13
  56. Making the Election 01:17:28
  57. Materials and Supplies 01:18:00
  58. Definition of Materials and Supplies 01:19:53
  59. Incidental Materials and Supplies 01:20:30
  60. Non-Incidental Materials and Supplies 01:22:50
  61. Non-Incidental Materials and Supplies Cont’d 01:24:11
  62. Non-Incidental Materials and Supplies - Examples 01:26:31
  63. All Materials and Supplies Fall Under De Minimus Safe Harbor 01:28:43
  64. Spare Parts 01:29:22
  65. Spare Parts Cont’d 01:33:27
  66. Rotables and Temporaries 01:34:43
  67. Capitalizing Spare Parts 01:38:19
  68. Presentation Closing 01:40:09
  • Accelerated Depreciation 00:14:19
  • Accounting (ACCG) 00:01:12, 00:05:49, 00:42:01
  • Alternative Minimum Tax (AMT) 01:05:17
  • Amortization 01:12:43
  • Applicable Financial Statement - AFS 00:38:42, 00:39:34
  • Asset 01:09:04, 01:14:18
  • Audit 00:38:45
  • Betterment 00:11:39, 00:14:45
  • Bonus Depreciation 00:14:29, 00:50:47, 01:05:17
  • Cost 00:10:56, 00:28:08, 01:08:47, 01:09:54, 01:11:30
  • De Minimus Safe Harbor 00:35:02, 00:39:24, 00:42:39, 01:26:48, 01:34:20
  • Depreciation 00:26:21, 01:01:22, 01:09:18, 01:34:20
  • Election Statement Section 1.263(a)-1(f) 01:09:24
  • Expenditure 00:13:09, 00:14:53, 00:16:21, 00:46:31
  • Expense 00:06:17, 00:07:38, 00:35:17, 00:47:02, 01:12:15, 01:19:06, 01:33:31
  • Fair Market Value (FMV) 01:34:43
  • Form 4562 01:17:44
  • Generally Accepted Accounting Principles (GAAP) 00:01:26
  • Heavy SUV Deduction 01:03:09
  • Incidental Materials & Supplies 01:18:42, 01:20:30
  • Intangible Personal Property 00:03:03:42
  • Inventory 00:42:11
  • Lessee 00:47:20
  • MACRS - Modified Accelerated Cost Recovery System 00:
  • Material and Supplies 01:18:00, 01:22:47
  • Non-incidental Materials & Supplies 01:18:46, 01:23:00, 01:28:54
  • Personal Property 00:03:00, 00:11:06, 01:07:02
  • Real Property 00:03:00, 00:11:06
  • Safe Harbor 00:35:40, 00:38:42, 00:48:56, 00:50:00, 01:19:23
  • Section 1245 00:59:20, 01:09:14
  • Section 162 00:07:15, 00:47:17, 01:38:22
  • Section 179 Deduction 00:14:27, 00:50:35, 00:56:56, 00:59:43, 01:07:59
  • Section 263 00:10:43
  • Tangible Personal Property 00:03:37, 00:07:42, 00:50:07
  • Tangible Property 00:02:07, 00:12:21, 00:27:59, 00:38:34, 00:50:39, 01:17:53, 01:18:30, 01:29:30
  • Total Cost 01:09:08
  • Unit of Property 00:29:06, 00:29:47, 00:33:29, 00:39:10
  • Wage 00:06:46

Accounting (ACCG): A systematic way of recording and reporting financial transactions for a business or organization.

Alternative Minimum Tax (AMT): Under the tax law, certain tax benefits can significantly reduce a taxpayer's regular tax amount. The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits. It helps to ensure that those taxpayers pay at least a minimum amount of tax.

Amortization: An accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time. (investinganswers.com)

Applicable Financial Statement - AFS: An AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes

Asset: Property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.

Audit: A formal examination of an organization's or individual's accounts or financial situation

Betterment: An improvement to an asset that makes the asset more efficient or more productive. In real estate terms, betterments are improvements to a property or to surrounding infrastructure, such as roads or sewers, that boost the value of a property. In business, a betterment is a capital expenditure that improves the value of an asset or extends its useful lifespan.

Bonus Depreciation: A valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of eligible business property, in addition to other depreciation. (www.thebalancesmb.com)

Code Section 1245: Section 1245 Property is any new or used tangible or intangible personal property that has been or could have been subject to depreciation or amortization. Examples of tangible personal property are machinery, vehicles, equipment, grain storage bins and silos, blast furnaces, and brick kilns.

Cost: The sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location

De Minimis Safe Harbor: The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules

Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Direct Costs: Direct costs are expenses that directly go into producing goods or providing services, while indirect costs are general business expenses that keep you operating. Examples of direct costs are direct labor, direct materials, commissions, piece-rate wages, and manufacturing supplies.

Election Statement Section 1.263(a)-1(f): This rule provides for a safe harbor applied at the invoice or item level, based on the policies used by a taxpayer for its financial accounting books and records. A taxpayer is generally required to capitalize amounts paid to acquire or produce a unit of real or personal property.

Expenditure: An expenditure is money spent on something. Expenditure is often used when people are talking about budgets.

Expense: Offset (an item of expenditure) as an expense against taxable income.

Fair Market Value (FMV): The term fair market value is used throughout the Internal Revenue Code among other federal statutory laws in the USA including Bankruptcy, many state laws, and several regulatory bodies. In litigation in many jurisdictions in the United States, the fair market value is determined at a hearing.

Financial Statement: Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. ... A balance sheet or statement of financial position, reports on a company's assets, liabilities, and owners equity at a given point in time.

Form 4562: Depreciation and Amortization is an Internal Revenue Service (IRS) tax form used to claim deductions for the depreciation or amortization of a piece of property.

Generally Accepted Accounting Principles (GAAP): A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

Heavy SUV Deduction: If the vehicle is classified as an SUV under the tax rules, the Sec. 179 deduction is limited to $25,000. Heavy non-SUVs — such as long-bed pickups and vans — are unaffected by the $25,000 limit.

Incidental Materials & Supplies: “Incidental” materials and supplies are personal property items that are carried on hand and for which no record of consumption is kept or for which beginning and ending inventories are not taken. In other words, these are inexpensive items not worth keeping track of.

Indirect Costs: Indirect costs are costs that are not directly accountable to a cost object. Indirect costs may be either fixed or variable. Indirect costs include administration, personnel, and security costs. These are those costs that are not directly related to production. Some indirect costs may be overhead. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.

Intangible Personal Property: Intangible personal property is an item of individual value that cannot be touched or held. Intangible personal property can include any item of worth that is not physical in nature but instead represents something else of value. Examples of intangible personal property include patents, copyrights, life insurance contracts, securities investments, and partnership interests.

Inventory: A company's inventory typically involves goods in three stages of production: raw goods, in-progress goods, and finished goods that are ready for sale. Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilization.

Lessee: In a lease agreement, the lessee is defined as the party that pays for the use of the asset or property.

MACRS - Modified Accelerated Cost Recovery System: The Modified Accelerated Cost Recovery System is the current tax depreciation system in the United States. Under this system, the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal Revenue Code.

Materials and Supplies: Under the regulations, material and supplies means tangible property that is used or consumed in business operations

Non-incidental Materials & Supplies: Non-incidental items are those for which a record of consumption or inventory is kept and can include items such as spare parts and inventory items for small businesses.

Safe Harbor: A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. It is usually found in connection with a vaguer, overall standard. Under the safe harbor, a “rental real estate enterprise” is treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise. ... The safe harbor requires that separate books and records be maintained for the rental real estate enterprise.

Section 162: Section 162(a) allows a deduction for all the ordinary and necessary expensespaid or incurred during the taxable year in carrying on any trade or business. Section262, however, provides that no deduction is allowed for personal, living, or familyexpenses

Section 179 Deduction: Section 179 of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time. Taking a deduction on an asset in its first year is called a "Section 179 deduction.

Section 263: Section 263(a) of the IRC requires you to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred. The tax law has long required you to determine whether expenditures related to tangible property are currently deductible business expenses or non-deductible capital expenditures.

Tangible Personal Property: Tangible Personal Property Tax is an ad valorem tax assessed against the furniture, fixtures and equipment located in businesses and rental property. Ad valorem is a Latin phrase meaning “according to worth”. This tax is in addition to your annual Real Estate or Property Tax.

Tangible Property: Tangible property in law is, literally, anything which can be touched, and includes both real property and personal property (or moveable property), and stands in distinction to intangible property.

Total Cost: Total cost is the total expenditure incurred to produce some type of output. From an accounting perspective, the total cost concept is more applicable to financial reporting, where overhead costs must be assigned to certain assets.

Wage: A fixed regular payment, typically paid on a daily or weekly basis, made by an employer to an employee, especially to a manual or unskilled worker.


Guest Speaker

  • Chuck Borek

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