Expense vs Capitalize? Tangible Real Property Regulations
Please see below for additional instructions and information regarding this program.
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:
- Maintenance vs. Improvements
Included are discussions on:
- Building Systems
- Unit of Property
- Safe Harbors
- 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?
§ 162: Ordinary $ Necessary 00:02:31
Note: Election Available 00:02:58
§ 263: No Deduction For: New Buildings/Improvements 00:05:18
The Landscape 00:09:13
The BAR Exam 00:12:52
Definition of Major Component 00:18:23
Definition of Substantial Structural Part 00:20:13
Burden Always on the Taxpayer 00:21:05
Improvement or Repair? 00:24:03
Unit of Property 00:26:14
De Minimus Safe Harbor 00:34:36
The De Minimus Safe Harbor Truce 00:35:08
Safe Harbor Requirements 00:40:00
Safe Harbor Carve-Outs 00:40:50
De Minimus Safe Harbor Election 00:41:43
Election Statement 00:42:19
Small TP Building Improvements 00:43:59
Small TP Building Improvements: Lessees 00:45:29
Small TP Building Improvements: “Small Taxpayer” 00:45:53
Small TP Building Improvements: 2 Restrictions of Note 00:46:39
Small TP Building Improvements: Attach Statement 00:47:42
179 Deduction 00:50:40
Expanded Coverage 00:51:57
Non-Qualifying Property 00:55:40
Purchased and Placed in Service Requirement 00:57:59
Business Use 00:59:26
Recapture Example 01:05:39
No § 179 Deduction for Cars 01:07:07
$25,000 § 179 Deduction for SUV’s 01:07:14
Heavy SUV’s 01:07:47
Bonus Depreciation 01:08:55
Elements of Cost Segregation Study 01:09:44, 01:11:42
Elements of Cost Segregation Report 01:12:20
Organizational Costs 01:14:19
Start-Up Costs 01:14:52
Organizational and Start-Up Expenses 01:15:45, 01:16:05
Organizational Costs 01:16:27
Start-Up Costs 01:16:45
Non-Qualifying Costs - Corps 01:17:30
Example 01:18:01, 01:18:40
Making the Election 01:19:22
Materials and Supplies 01:20:24
Definition of Materials and Supplies 01:25:14
Incidental Materials and Supplies 01:27:12
Non-Incidental Materials and Supplies 01:27:40, 01:29:00
Non-Incidental Materials and Supplies Examples 01:31:17
All Materials and Supplies Fall Under De Minimus Safe Harbor 01:31:56
Spare Parts 01:32:54
Rotables and Temporaries 01:36:49
Capitalizing Spare Parts 01:38:59
Presentation Closing 01:39:53
- Amortization 00:08:47
- Betterment 00:06:14, 00:13:37
- De Minimus Safe Harbor 00:34:40, 01:32:02
- Election Statement Section 1.263(a)-1(f) 00:42:28
- Expenditure 00:03:20, 00:09:34
- Expense 00:02:42
- Form 4562 01:19:35
- Heavy SUV Deduction 01:07:21
- Incidental Materials 01:22:08
- Intangible Property 00:08:03
- Material and Supplies 01:20:29
- Non-incidental Materials & Supplies 01:22:10
- Personal Property 00:07:15
- Real Property 00:07:13
- Section 1245 01:02:38
- Section 162 00:02:37, 00:06:41
- Section 179 Deduction 00:50:40, 00:59:33
- Section 263 00:05:29
- Tangible Property 00:05:57, 00:07:08. 09:09:18
- Tax Cuts and Jobs Act 00:55:04, 01:07:26
- Unit of Property 00:20:24, 00:26:19, 00:31:02
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)
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.
De Minimus 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
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.
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.
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 : “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.
Intangible Property: Intangible property, also known as incorporeal property, describes something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but has no physical substance, for example brand identity or knowledge/intellectual property. (en.wikipedia.org)
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.
Personal Property: Personal property is something that you could pick up or move around. This includes such things as automobiles, trucks, money, stocks, bonds, furniture, clothing, bank accounts, money market funds, certificates of deposit, jewels, art, antiques, pensions, insurance, books, etc.
Real Property: Real property is land and any property attached directly to it, including any subset of land that has been improved through legal human actions. Examples of real properties can include buildings, ponds, canals, roads, and machinery, among other things
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.
Section 162: Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 262, however, provides that no deduction is allowed for personal, living, or family expenses
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 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.
Tax Cuts and Jobs Act: The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub.L. 115–97, is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs Act, that amended the Internal Revenue Code of 1986.
Unit of Property: Per the regulations, a “unit of property” is comprised of all components that are functionally interdependent. So, a truck (including its engine, chassis, doors, etc.), or a building and its structural components (including the walls, roof, windows, etc.), comprise a unit of property.
Chuck Borek is a practicing attorney and founder of the Borek Group, LLC. Chuck is also a CPA, and his background includes five years as a partner in a public accounting firm. He received his law degree and MBA summa cum laude from the University of Baltimore in 1993, where he was editor-in-chief of the Law Review. He has been teaching professionally since 1989, including four years as an Associate Professor of Accounting and two years as a Visiting Assistant Professor of Law. He ha... View Full Profile
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