Tangible Property Regulation (TPR) Toolkit for CPA Firms and Companies
The benefit to your clients or Company can be significant; alternatively, non-compliance can be costly.
After nearly a decade in the making, the IRS released the final Tangible Property Regulations (TPRs) September of 2013. All taxpayers with depreciable property will be required to comply with these new regulations no later than the due date of their 2014 tax returns. The new compliance will include changes in the taxpayer’s internal processes, new annual elections, and filings of multiple federal IRS Form 3115’s, Application for Change in Accounting Method.
B&R has developed a comprehensive TPR Tools and Templates© (Toolkit) package consisting of multiple tools (Excel, Word, pdfs, voice files, power point presentations) designed to assist with the implementation of the regulations. This package includes examples, tools, templates, and related supporting training and documents for a firm to use to implement the TPRs for its clients or Company.
Complying with the law is burdensome and the magnitude for every CPA firm or Company cannot be overstated. Not only will every taxpayer with tangible property be required to file one or more Form(s) 3115 for each accounting method change; that filing will also need to be done for each separate entity, trade or business.
To date hundreds of firms across the country are utilizing the B&R TPR Tools and Templates©. These CPA practices range from smaller 4-5 person firms to firms with 20+ offices. Subscribing firms access our Toolkit by creating a user name and password at www.tprtoolsandtemplates.com. Led by nationally known tax expert Eric Wallace, CPA, our dedicated team of experts continually monitors and updates our tools and templates “real time” as the IRS is regularly issuing additional updates.
We would welcome the opportunity to work with your firm or Company to assist you in mastering the internal and client service issues related to these difficult new regulations. The price for the Toolkit is based on the revenue size of the firm or Company.
For additional information on TPR Tools and Templates© contact Vanessa Wallace, firstname.lastname@example.org or call 717-761-7210.
This collaboration of resources was developed by Eric P. Wallace, CPA. Eric has been the experts on the TPR issues (sections 162, 167, 168, 263(a) and 1016) for CCH, and several large CPA firms since their issuance in late 2011.
Why are the TPRs a Significant Issue to CPA Firms?
The new tangible property regulations are the most dramatic changes in tax law to affect for profit businesses since the overhaul of the Internal Revenue Code in 1986. The final regulations were released in September 2013, and greatly varied from the temporary TPRs issued in 2011.
As a requirement of these TPRs, most taxpayers will have to:
- Modify their internal processes to comply with these new rules, and
- File one or more applications for accounting method changes (IRS Form 3115) for their 2012, 2013, and/or 2014 tax years. In fact, it is anticipated that each business taxpayer may have to file several different 3115’s.
- Elect three new elections annually in order to deduct certain expenditures, rather than capitalize or continue to depreciate prior assets.
It does not matter what form of business one is in, whether a “C” corporation, an “S” corporation, a partnership, an LLC, a sole proprietorship (Schedule C on individual return), or a rental (Schedule E on individual return); these new rules and requirements apply if there is tangible property in the business, whether in the form of materials and supplies or items to test for capitalization.
Complying with the law is burdensome and the magnitude for every CPA firm cannot be overstated. Not only will every taxpayer with tangible property be required to file one or more Form(s) 3115 for each accounting method change; that filing will also need to be done for each separate entity, trade or business.
For example, an individual filing a Form 1040 that owns three rental entities which he rents to his business locations (and those rental properties are held in separate LLCs) will be required to file three (or more) separate Form(s) 3115, and attach those to his 1040 filing for the year. (The 3115’s filing “year” can be either: 2012 or 2013, but no later than tax year 2014.
The CPA must determine the best tax year for each client that would result in the best filing opportunity (i.e. either tax reduction or deferral of any required tax increases).
Imagine all of this work added to tax season 2013 or 2014. This is why we are encouraging CPA firms to address and start on this massive undertaking during the winter of 2013 or after tax season of 2013.
The advantages of addressing these issues now include:
- New revenue dollars for the CPA firm;
- Less compression time during tax season;
- Better tax planning opportunities for client write-offs (take advantage of those in 2013 or 2014);
- Permitting the time necessary for either the CPA or client to gather the necessary data on prior asset acquisitions or at least communicate with its clients, and;
- Avoiding loss of business to outside service providers providing implementation services.
Significant Tax Deductions May Be Available
These regulations also provide potential tax deduction opportunities. Taxpayers are able to expense greater amounts for certain repairs, materials and supplies. These are now deemed to be “de minimis” amounts. More importantly for many taxpayers, he or she may be able to write-off in these tax years the net tax value of certain previously capitalized assets.
For example, the following list contains typical potential write-off opportunities:
- Roof costs that were previously capitalized may now have their net tax value written off, if a roof improvement is (or was) subsequently made
- Manufacturer or franchisor required refreshments, or previous ones
- Prior leasehold improvements or portions thereof
- Previously capitalized improvements that are now considered “repairs”
A Word of Caution about the TPRs and Depreciation
Under these new tangible property regulations, if a taxpayer does not implement these new rules and properly file the necessary Form(s) 3115 under the correct new method(s), they will LOSE their current tax depreciation or miss the potential write-off on previously capitalized assets that will just have to be continued to be depreciated.
Under prior law, one was required to continue to depreciate certain assets that were disposed of. Under the new law, one has the option to write them off. This new law is going to focus the IRS efforts on the depreciation schedule. This is why it is also necessary for CPAs to scrub their client tax depreciation schedules and file the proper forms. Simply put, addressing these TPR issues and depreciation corrections will protect your client base from other CPA firms bringing similar tax planning ideas to your clients. At the same time, know that this is big new revenue for CPA firms.
Where to Begin
We have found the source of the TPR changes to be the depreciation schedule. The 2012 client depreciation schedule is the key data source to be gathered, filtered to only show those assets with remaining tax depreciable basis, and to be examined for the following errors and potential TPR method changes if one is filing the method changes for tax year 2013 (generally all of the following will result in a negative 481(a) adjustment, i.e. taxpayer favorable, for the clients):
- Bonus depreciation taken incorrectly
- Improper depreciable lives
- Depreciation taken or not taken on assets not owned
- Routine maintenance safe harbor
- Prior capitalization of items that the clients did not need to capitalize (in light of the new TPRs)
- Partial building dispositions
All of these corrections and supporting materials are part of our TPR Tools and Templates©.
All client depreciation schedules will have to be reviewed. Why?
If you miss a depreciation impermissible method, it will be an IRS “gotcha.”
Review your depreciation schedules to see what assets qualify for the write-off described above, and match that to your best benefit (i.e. tax years 2012 to 2013, or 2014, see below for a discussion of the appropriate tax year(s). This effort may require the use of cost segregation studies or other “reasonable methods” in order to arrive at the remaining un-depreciated tax basis that will qualify for write-off.
Plan Ahead for the TPR Tsunami
We have estimated that, on average, 50% of your business returns will have depreciation errors that will require the filing of a Form 3115; however, 100% of those C, S, P, or 1040s (with Schedule Cs, Fs, or Es) will also have several 3115 filings each for the TPR changes. These filings will be spread out between tax filing seasons 2013 to 2014. How can you relate these numbers to your tax practice?
Our conclusion regarding a “rule of thumb” for the number of TPR and depreciation 3115 forms to be filed for either tax year 2013 or 2014 is to take the total number of business clients you have and multiply that number by 2.5 to 3 times. For many, that is the equivalent of taking the number of business returns you prepare over four tax seasons and compressing that effort into one tax season.
Client Internal Process Must Change
There are also client internal processes that will need to be changed to deal with the TPR main “must dos”:
- Accounting for “non-incidental” material and supplies; now these should be inventoried at tax year-end and not expensed until put in place or used
- Establishment of a de minimis capitalization “write-off” policy dictating a certain write-off amount (e.g., “our policy is that we are going to expense all purchases under $1,000”). If you do not, you may be limited to a $200 per item “write-off” policy.
- Decisions to make one to six of the new annual elections
- Write off of prior or partial asset dispositions
- The new building write off opportunities under the new small taxpayer or routine maintenance rules
Choice of 2013 and/or 2014 Filings
While the temporary regulations provide taxpayers with the option of adopting these changes in either the 2012 or 2013 tax year, the final TPRs must be filed for 2014 and beyond. The final regulations will apply to taxable years beginning on or after January 1, 2014, but permit taxpayers to apply the final regulations to taxable years beginning on or after January 1, 2012. A Treasury Decision (T.D. 9564) was released amending the temporary regulations to apply to taxable years beginning on or after January 1, 2014, while permitting taxpayers to apply the temporary regulations for taxable years beginning on or after January 1, 2012, and before the applicable date of the final regulations. That rule has been changed.
A taxpayer will be able to “pick and choose” which accounting method changes (i.e. from the temporary or final TPRs) can be adopted in either 2012 or 2013, but only the final TPRs are applicable after 2013. A CPA will want its clients to adopt those methods first that provide the greatest write-off, and defer those that require taxable income increases. Certain sections of the temporary regulations were revised in a manner that may, in certain cases, simplify taxpayers’ implementation of the rules when the final regulations method changes are issued in their final form. These sections include those allowing for write off of “de minimis” amounts, write off of the net tax value of certain previously capitalized assets and the safe harbor for routine maintenance.
The new TPR regulations are not going to be easy to implement. The rules are complicated and, in many cases, not clear. The facts and circumstances of each business situation will need to be analyzed to determine the proper treatment of these expenditures.CPAs should evaluate the importance and time restrictions in implementing these rules to assure proper compliance with the regulations, and to master the TPRs sufficiently enough to determine whether the taxpayer should choose from the rules of the temporary or final TPRs.
We encourage you to contact Eric P. Wallace, CPA with any questions that you may have on the attached TPR Tools and Templates© in order to assist you in these complicated tasks.
How to Start the Process
In order to get started, we will send you an arrangement letter in which we agree to provide you with access to our TPR Tools and Templates© and any and all updates. Its purpose is also to protect our copyrights. In general, the price for the TPR Tools and Templates© depends on the size of your firm. There are specific discounts available to certain CPA firm associations. If you are a member of a firm association, please let us know.
We would welcome the opportunity to work with your firm to assist you in mastering the internal and client service issues related to these difficult new regulations.
For additional information on TPR Tools and Templates© contact Vanessa Wallace, email@example.com or call 717-761-7210.