In 2014, the IRS issued guidance, which over the last several years has made a significant impact on how hotel, restaurant, and food distribution owners capitalize and depreciate assets placed into service. Effective for tax years beginning January 1, 2014, the tangible property regulations regulate the treatment of normal repairs and maintenance versus an improvement to an asset. The regulations also clarify whether fixed asset additions must be capitalized or expensed immediately.
Wondering how this applies to your business, and if you need to make changes to take advantage of potential savings? Find out below.
What must be implemented?
All taxpayers that have depreciable fixed assets must have a capitalization policy that determines the threshold under which a fixed asset or an improvement to a unit of property is to be capitalized and depreciated. Under the new regulations, the IRS will allow a business without audited financial statements to have a “safe harbor” threshold of $2,500 per unit of property and $5,000 per unit of property for business owners with audited financial statements. While taxpayers are allowed to use higher capitalization thresholds, the taxpayer must be able to justify using a threshold above the allowed safe harbor amount in the event of an audit.
What is considered an “improvement to a unit of property”?
Business owners must make the distinction between routine maintenance and an improvement to a specific asset or unit of property. Improvements to a unit of property that must be capitalized and depreciated over its useful life are defined as betterments, a restoration to an original state, or an adaptation to a new use. Examples of a unit of property can include the building, HVAC system, and electrical system. Common improvements for hotel and restaurant owners could include expanding the hotel building or a restaurant conducting renovations to the inside of the building space used for restaurant operations.
What is considered routine maintenance?
Routine maintenance may be written off if the action will be completed more than once over a ten-year period. This could include hotel owners putting down new asphalt in the hotel’s parking lot every five years or restaurant owners replacing the floor titles of their restaurant every few years.
Can you deduct materials and supplies?
Under the regulations, there is a set de minimis of $200 or a useful life of 12 months or less that can be expensed immediately upon purchase. This allows hotel, restaurant, and food distribution owners to immediately expense items such as bed linens, glassware, tablecloth linens, utensils, and manufacturing supplies.
What are the opportunities under the regulations?
The regulations require great diligence in both year-end tax planning and tax return preparation, but do allow for substantial tax savings techniques for hotel, restaurant, and food distribution owners. Accelerated deductions of asset additions could be obtained under the tangible property regulations. If a unit of property such as a HVAC system or electrical system is placed in service and it replaces an old system, the business owner may be able to write off the old HVAC or electrical system that was replaced.
Each year, business owners should review their fixed asset purchases to determine if there are any additions that can be directly expensed or if there are any prior fixed assets additions that can be disposed of. Please reach out to us if you have any questions or would like more information on the tangible property regulations and the impact it can have for a restaurant, hotel, food distributor, or company that services the hospitality industry.
The Internal Revenue Service (IRS) LB&I audit division announced a series of campaigns for issues they have identified as ripe for noncompliance. LB&I handles tax examinations for businesses with assets in excess of $10 million. The success of these campaigns typically trickles down to other audit divisions and can become standard procedure.
One campaign is targeting S corporations that report losses to its shareholders, to verify that the shareholder has sufficient basis to deduct the loss. This does not mean every such S corporation will receive an audit notice. Some may be audited while others may receive letters questioning particular items on the return, asking for an explanation or clarification.
If you are a shareholder in an S corporation, we recommend that you review your basis schedule for accuracy or work with your tax advisor to begin maintaining one. It is the shareholder’s responsibility to support any loss claimed on the tax return.
For questions about this topic or more information, please contact Aronson’s Laurence C. Rubin, CPA, at 301.231.6200.
Some IRS filing dates have changed for the 2016 year; annual employee and information returns must be filed sooner than ever. The Consolidated Appropriations Act of 2016 calls for changes to help combat tax fraud, including the new accelerated due dates for employer copies of forms W-2 and 1099-MISC. The previous filing deadline of February 28, for forms W-2 to the Social Security Administration and 1099-MISC to the Internal Revenue Service, has changed to January 31, of the following year.
In addition to being the 2016 employer filing deadline, Tuesday, January 31, 2017, is also when these forms must be distributed to employees.
IRS-imposed penalties can be substantial. If you miss the filing deadline, it could result in late fees ranging from $50 to $260 per filed form. Furthermore, keep in mind that if you have 250 or more forms to submit, the forms must be filed electronically. An IRS penalty will be imposed on companies who violate the electronic filing rule by submitting paper forms.
If you have questions regarding the new filing deadlines or would like to discuss your particular situation, please call your Aronson tax advisor at 301.231.6200.
The latest incarnation of aggressive scammers impersonating IRS agents features fake IRS notices arriving by e-mail or snail mail.
According to the IRS, the fake notices labeled as “CP2000”, purport to be related to the Affordable Care Act and request information related to 2014. For further details, see the IRS announcement on this topic.
The CP2000 is a legitimate notice number that is mailed to taxpayers, which makes it even harder for you to realize it could be fraudulent. When in doubt, show the notice to your tax advisor, or call the IRS at 1.800.829.1040 to ask about the status of your account. Do not call the number shown on a notice you are uncertain about.
Any payments made to the IRS by check should be payable to United States Treasury. Such a check is far less likely for a recipient other than the IRS to cash. Better to be safe than sorry! Consider making all payments directly to the IRS online using DirectPay or setting up an EFTPS account. Online payments provide a confirmation number at the time payment is made, and enough information to your bank that in the event of a problem, the destination of the funds can be traced.
Important changes coming in October – If you are a taxpayer with an Individual Taxpayer Identification Number (ITIN), there is an important change that takes effect October 1, 2016. ITINs must be renewed if one of the following two criteria applies:
You can only renew your ITIN by submitting form W-7 to the IRS by mail or at a walk-in IRS office. The link provided here is to the most recent form, which is the only version that may be used for ITIN renewal. While the renewal process can take up to 60 days, failing to renew your ITIN prior to a tax return filing will result in refund delays and loss of various tax credits, until it’s reestablished.
Don’t wait for a renewal notice in the mail from the IRS to affected taxpayers, we recommend that those with ITINs be proactive and renew if necessary, to be prepared for this upcoming filing season.
For more information, please contact Aronson Partner, Larry Rubin, CPA, at firstname.lastname@example.org or 301.231.6200.