Taxpayers Can Revisit Application of Tangible Property Regulations on 2016 Returns

A new IRS notice provides relief for taxpayers that haven’t fully implemented the final tangible property regulations by alleviating certain restrictions that could prevent them from requesting an accounting method change. A comprehensive review of your tax accounting methods for items affected by the tangible property regulations can create significant cash flow and potentially permanent benefits for taxpayers.

Normally, the IRS prohibits taxpayers from filing a second accounting method change request for the same item if the first method change request was filed within the most recent five tax years. This is commonly referred to as the five-year eligibility limitation.  However, Notice 2017-6 grants a one-year waiver of the five-year eligibility limitation for tax years beginning before January 1, 2017. It applies to most method changes related to the tangible property regulations, including changes for:

  • Repairs and maintenance
  • Capital improvements
  • Materials and supplies
  • Physically disposed assets that are still included in a taxpayer’s fixed asset records
  • Acquisition costs

Potential Benefits

By revisiting their current compliance with the final tangible property regulations this year, taxpayers that previously filed a method change can tap into three key benefits:

  • Evaluate whether they have effectively implemented the impact of the regulations into their accounting procedures for the post-change tax years
  • Analyze all prior expenditures in a more comprehensive way
  • Explore the possibility of a permanent tax benefit if income tax rates are reduced as part of overall tax reform

Post-Change Implementation

Many taxpayers continue to rely on their financial statement determination of whether costs incurred require capitalization as an improvement to property even though the requirements under the regulations may permit a current deduction for the same costs. The new notice permits such taxpayers to revisit their current tax accounting and potentially benefit from deducting costs not requiring capitalization.

A Closer Analysis

It also permits taxpayers that requested the method change without fully reviewing their prior costs incurred to determine if, in fact, they can benefit now from requesting another change after performing a more comprehensive analysis.

Possible Tax Rate Reduction

An added reason to re-evaluate your current treatment for these items is the potential for a permanent difference resulting from a reduction in income tax rates. With the prospects for tax reform greater given the results of the national election, a tax rate reduction could potentially create a permanent difference if you can claim the deduction when a higher tax rate applies.

To illustrate, assume a taxpayer can file a method change request to treat $3 million of costs capitalized as building improvements (currently being recovered through depreciation) to instead claim repair and maintenance expense deductions for such costs in the 2016 tax year. For the 2016 tax year, assume a 35 percent tax rate applies; for subsequent years, assume a 15 percent rate applies. Accelerating the deduction into the higher tax rate year creates a permanent benefit of $600,000 to the taxpayer.

We're Here to Help

We can help you assess this opportunity to determine if you can benefit. If you have questions about how you and your business can benefit from revisiting your application of the tangible property regulations, contact your Moss Adams professional.