Final Tangible Property Regulations (TARS) are here after a near decade-long production. Commonly called “repair regulations,” these rules try to clarify a very complicated portion of tax law. They affect all taxpayers that use tangible property in their businesses. These comprehensive regulations include more than 200 pages of guidance. Implementing these rules demand a careful evaluation of each taxpayer’s facts and circumstances and will require clubs to find new ways to collect the data necessary to file a proper return.
The new TARS regulations address the expensing and depreciation of:
- Materials and supplies – new accounting rules and practices regarding account treatment and material and supply deductibles as well as new definitions for materials and supplies. For example, if an item costs $200 or less or has a 12 month or less economic shelf-life, the item is defined as a material or supply and the taxpayer can file for a higher deduction.
- Repairs and maintenance – new rules to identify a repair versus a capital expenditure.
- Asset acquisitions – taxpayers will typically need to capitalize expenses involved in acquiring or creating tangible property.
- Improvements to property – these must now be capitalized when the expenditure is a “betterment” to the property, “adapts” the property to a new or different use, or is a “restoration” of the property. These are also known as “BAR” tests.
The regulations are effective for years beginning on or after January 1, 2014. The regulations likely will require many clubs to file at least one change in accounting method (FORM 3115) along with making certain elections and changes to the club’s capitalization policy. These rules are complex and the time to implement them is short. The change in accounting method form must be filed before your 2014 tax returns are submitted.
If a club exempt under section 501(c)(7) has unrelated business income, the regulations could apply to them and a change in accounting method may need to be made particularly as it relates to repairs and supplies. This occurs as a result of the allocation of certain expenses to the nonmember income. For taxable membership organizations and other taxable clubs, the TARS definitely will apply. Any taxpayer with fixed assets, repairs, and/or supplies are required to comply with these new rules or potentially lose part of the deductions. In conversations with IRS representatives, they have indicated they expect at least one 3115 for each taxpayer that has either fixed assets or repairs even if nothing is changing. Failure to prepare a proper Form 3115 could potentially increase your audit risk in the coming years. For more information, seek counsel with your club accounting consultant.
Clubs should not wait until filing their 2014 tax returns before addressing issues related to the new tangible property regulations. These rules pose new risks and challenges for CPAs and taxpayers that cannot be quickly overcome. Therefore, it is imperative for clubs and CPAs alike to gain a thorough understanding of the new code and create systems to collect the necessary data to comply with the regulations.
Kevin Reilly is a partner at PBMares, LLP. His areas of practice include hospitality consulting including clubs, hotels and restaurants, real estate consulting, individual and business tax planning and preparation, and business advisory services. He serves as a director of NCA and as secretary/treasurer of the NCA Foundation. You can reach him at [email protected] or 703-385-8809.