TPR Update: Favorable Changes for Some Taxpayers

As we wrap up the second year in which the tangible property regulations (TPR) have been in effect, the IRS has started addressing some of the issues with the implemented regulations. The good news: they are listening to the feedback provided by taxpayers and practitioners and are providing a couple of taxpayer-friendly updates.

De Minimis Safe Harbor Limit Increase

The first update relates to an increase in the de minimis safe harbor limit from $500 to $2,500 for taxpayers without Applicable Financial Statements (AFS). This safe harbor in the final TPR took effect 1/1/2014 (or earlier, if a taxpayer so elected) and allowed taxpayers to expense tangible property up to $500 per item for taxpayers without AFS. On November 24, 2015, the IRS issued Notice 2015-82 that increased the de minimis safe harbor limit for taxpayers without AFS. However, the de minimis safe harbor for taxpayers with AFS remains unchanged at $5,000.

The increase in the de minimis safe harbor for taxpayers without AFS from $500 to $2,500 is effective for costs incurred for taxable years beginning on or after 1/1/2016. However, upon audit, the IRS will not question the use of the higher de minimis safe harbor amount for taxable years beginning before 2016 (assuming all other requirements for the use of the safe harbor are met). Therefore, early adoption of the higher threshold is recommended for 2015.

Capitalization Standards

The second update has a much narrower focus but is encouraging nonetheless. It addresses the complexity of applying the capitalization standards introduced in the regulations. On November 19, 2015 the IRS issued Revenue Procedure 2015-56 which established a safe harbor for accounting for certain retail and restaurant remodel costs. The safe harbor allows for 75% of qualifying costs incurred in a remodel or refresh project to be deducted in the current year with the remaining 25% to be recovered through depreciation deductions. The safe harbor is limited to remodel or refresh projects for the retail and restaurant industries for taxpayers that have AFS, and requires a change in accounting method to be filed with the IRS.

While there are still numerous ways the IRS could assist taxpayers in simplifying the tangible property regulations, this is a step in the right direction. Please consult your tax advisor to see how these changes impact your situation for 2015.

This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern.