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 U.S. Treasury has issued proposed regulations governing the filing of U.S. Foreign Bank Account Reports (FBAR). The new rules provide several key revisions to the existing FBAR regulations under 31 CFR § 1010.350. The FBAR regulations are issued under the legislative authority of the Bank Secrecy Act. Key points of the proposed regulations include:
1. The requirement would be eliminated for U.S. officers, employees, and agents of U.S. entities to report signature authority over foreign financial accounts owned by the entity if the individual does not have any financial interest in the account. The U.S. officer, employee, and agent of the U.S. entity would not have to report such accounts on their respective individual FBAR, if the accounts are reported on an FBAR filed by their employer or any other entity within the same corporate or business structure. The employer would be required to maintain records for five years to document all U.S. officers, employees, and agents with signature authority over the entity’s accounts.
2. The relief which currently allows limited reporting on the FBAR when a filer has 25 or more reportable accounts would be eliminated. The proposed rule would require U.S. persons with 25 or more reportable accounts to provide the detailed account information for each reportable account on the FBAR in the same manner as filers with less than 25 accounts.
3. The new FBAR filing due date will be April 15, with a six month extension allowed to October 15, beginning with FBARs filed for the calendar year 2016.
For more information, please contact Aronson LLC tax advisor Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.