Put Firm Logo or Letter head here Capitalization of Tangible Assets Understanding the New IRS Regulations and What [client name] needs to do in Response Presented by xxxxxxx CPAs and Consultants xxxxxxxxxx, CPA and xxxxxxx, CPA Month Day, 2014 Put Client Logo Here

2 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Meeting’s Discussion Topics Materials and supplies—definitions of materials and supplies Discussion of the new de minimis safe harbor rules and annual elections Repairs—deductions for amounts paid to repair and maintain property not required to be capitalized under 263(a) The expenditures required to be capitalized  Betterments, Restorations, New Use Building or component dispositions Introduction on how to change accounting methods

3 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Today’s Learning Objectives Understand the tangible property regulations (TPRs) that the IRS has changed related to:  Write offs:  Repairs and maintenance  Materials and supplies  Capitalization Issues:  Improvements to property  Acquisitions and dispositions of assets What you need to follow up on (changes in accounting methods related to these regulations) What is the impact of these TPRs to you (both tax and financial statement)

4 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here 10,000-Feet TPR Observations New objective rules of what is the criteria to employ on determining what should be capitalized What you have done to date (asset groupings, cost segregation, depreciation choices) matter Cost segregation still relevant and needed Multiple Code Sections changed, not just 263(a), but also Sections 162, 168 Every taxpayer (TP) is affected, just about every TP will have to file four to five 3115s (IRS form for Change in Accounting Method) We will need a lot of old facts/data from you

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Depreciation Allowable or Taken – this issue is “huge”. Points: (1) Suggest that you use the fall to winter of 2014/2015 to correct any errors in prior year depreciation, and note that (2) section is part of the TPRs for a reason – that is the “scary” part – the IRS will use this in their future audits of TPs to deny depreciation deductions or items that could have been written off as R & M in prior years

6 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here § Exhaustion, Wear and Tear, Obsolescence, Amortization, and Depletion Determination of the amount properly allowable for exhaustion, wear and tear, obsolescence, amortization, and depletion must be made on the basis of facts reasonably known to exist at the end of the taxable year. A TP is not permitted to take advantage in a later year of the TP's prior failure to take any such allowance or the TP's taking an allowance plainly inadequate under the known facts in prior years. Caution: In the case of depr., if in prior years the TP has consistently taken proper deductions under one method, the amount allowable for such prior years must not be increased even though a greater amount would have been allowable under another proper method.

7 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Warnings for Taxpayers (TP)…if (1) a TP does not identify all of the tangible property issue(s), (2) a TP does not implement the rules correctly, AND (3) file all of the necessary 3115s under the correct new method(s), the TPs could have certain current and future tax depreciation denied and/or miss the potential write-off on previously capitalized assets. This exposure is greatest for errors asset class lives, in bonus depreciation, and for building issues, since that is where the greatest dollar amounts exist. Your exposure for errors is great and the time to execute is limited.

8 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here “Errors” (are impermissible methods) in Depreciation Deductions Must correct most issues/impermissble methods (class life or bonus errors) by filing a Unless the issues/methods were done only in the prior tax years, the TP is not permitted to make these corrections with an amended return Cannot fix depreciation errors by “catching up” on prior year errors

9 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What TPs Need to Do Depreciation Schedules: fix them before the IRS disallows missed depreciation  Fix based upon the new TPR viewpoints – not why it was done when it was added to the depreciation schedule Assess conformity of your current policies and procedures with these TPRs  Capitalization policies  Minimum capitalization thresholds  Routine maintenance expenditures  Internal tracking and capturing data Current method(s) conform to TPRs?  If not, need to file 3115s

10 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Depreciation Error Process 1. Find out what ‘activity’ the business is in by reviewing Rev. Proc a) This will instruct us what the asset guideline class lives should be, O/T asset classes to to 00.4 are the “common” class lives. b) Based on the business’ “activity” we may have class lives that are different from the common class lives. c) to 00.4 state the following: office equipment is 7 years; computers =5, copiers=5, cars and trucks=5, land improvements=15 d) But if an activity such as 33.3, land improvements are 7 years; if 57.0 (distributive trades and services) equipment assets are 5 years, unless they fit into to 00.4.

11 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What After Depreciation Errors? 2. There are other issues that are not depreciation errors, but rather are TPR issues that are generated from a review of the depreciation schedules. There are: a) Repair items that were capitalized. (items that were capitalized but viewed now under the TPRs would have been written off). b) Prior building write off issues. (new roof was added but old roof can now be written off a)This can be done even if the old roof comes from many years ago (example: old roof was put on in 1995 – there is still many years of depreciation remaining that can be written off as the asset was put on with a 39 year life)

12 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What you need to address first on most of the TPR Issues (after addressing depreciation error corrections): - two items – TPR Issue(s) identification Unit of Property

13 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Issue(s) Identification – “the list” The actions a TP may need to take under these TRs are not limited to:  Change in unit of property or statement to IRS on what you want yours to be : do we have buildings grouped together in the depreciation schedule? (example: multiple buildings in an apartment building)  The need to breakout prior costs for property capitalized (i.e. what is the detail in that 39 year asset account where the roof was replaced years ago?)  Write off or capitalize current year expenditures (and if we capitalize, do we have prior to dispose of?

14 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Issue(s) Identification - 2 If we have to write off prior assets, do they still have basis that can be written off?  If fully depreciated, unless we also want to write off the removal costs of the new asset, we are done with this asset. Just capitalize the current expenditures and depreciate them properly over future years If we have to write off these prior assets (or removal costs) and they still have basis, we have to determine whether we are going to write those assets off in a 3115 filing under the “cost known” method (such as a cost segregation or being able to recreate the original costs) or under a “reasonable allocation” method (such as a CPI or PPI “lookback”)

15 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Issue(s) Identification - 3 Do we need to correct depreciation errors (i.e. bonus, lives)? Every depreciation schedule will need to be “scrubbed” for errors. These will require 3115 filings in order to take the (typical) negative 481(a) adjustments. We have decided, in general, that this is fall/winter work for 2014 and that these changes must be attached to the 2014 income tax returns. Adopt new accounting method(s) – (numerous potential methods) File 3115(s) (separately or together) for what?

16 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Unit of Property (UoP) Is a very important element to these and other regulations Do You first need to change any UoP before you makes a method change under the new TPRs?

17 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Unit of Property (UoP) UoP is a very important issue, why?:  It is an important criteria in the decision whether a TP can write off an expenditure Generally:  The smaller the UoP the more likely the expenditure will be required to be capitalized This issue should almost always be considered in TPR issues, most of the time, early. If it is a problem, it must be changed and 3115 filed. If not, move on.

18 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Building UoP Examples Apartment complex with multiple buildings – all listed as one asset on the depreciation schedule:  UoP must be changed to each building (but capitalization considerations on building components and/or system are measured in comparison to that building component that performs a unique function or specifically enumerated system) Retailer complex with multiple buildings:  UoP is each individual separate building

19 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Review of the TPR Main Standards

20 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What the Tangible Property Regulations (TPR) Do TPRs provide guidance on the application of Sections 162(a) (deduction) and 263(a) (requires capitalization) of the Code to amounts paid to acquire, produce, or improve tangible property.  Regulations aim to clarify the difference between these two opposites Final regulations were issued in September of 2013 and only give us through tax year 2014 in which to make these new method changes and potential numerous annual elections Final MACRS disposition rules were issued in Aug of 2014 and only give us through 2014 in which to remove duplicate assets under the partial asset disposition (PAD) rules Clarify and expand the standards under Sections 162(a) and 263(a) Provide certain bright-line tests (for example, new de minimis safe harbor rules for certain acquisitions) Provide guidance under Section 168 regarding the accounting for, and dispositions of, building property

21 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What the ‘Repair’ Regulations Do TR will affect all taxpayers that acquire, produce, or improve tangible property Regulations are effective on January 1, 2014 or for taxable years that begin after , but can be applied for tax years 2012 to 2013 (so why not apply the “beneficial” method changes as early as possible and get a nice tax deduction?)

22 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here What the ‘Repair’ Regulations Do Splits the definition of tangible property into two categories:  Buildings  Everything else For Buildings: a building and its structural components are treated as a single unit of property, but when improving “building systems,” those must be considered separately when determining capitalization or not

23 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Building and Structural Components 1.263(a)-3(e)(2) (UoP) General rule that the UoP for a building is comprised of the building and its structural components Requires that a TP apply the improvement standards separately to the primary components of the building, that is, the building structure or any of the specifically defined building systems. A cost is treated as a capital expenditure if it results in an improvement to the building structure or to any of the specifically enumerated building systems. Defines the building structure as the building (§1.48-1(e)(1)) and its structural components (§1.48-1(e)(2)) other than the components specifically enumerated as building systems. A UoP is a method of accounting

24 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Building and Structural Components 1.263(a)-3(e)(2) (UoP) Defines building systems to include (1) the heating, ventilation, and air conditioning systems (“HVAC”); (2) the plumbing systems; (3) the electrical systems; (4) all escalators; (5) all elevators; (6) the fire protection and alarm systems; (7) the security systems; (8) the gas distribution systems; and (9) any other systems identified in published guidance These are considered improvements to the building: Replacement of an entire roof, improvement to the HVAC system These are not: new shingles, new rubber membrane

25 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Building and Structural Components 1.263(a)-3(e)(2) (UoP) Old Rule: Taxpayer was required to depreciate building improvements over the life of the original asset (39 years), even if building had been 29 years into its depreciable life; no write off of the replaced component  If one replaced a roof, for example, you depreciated two roofs—the original one and the replaced one, or three roofs, etc. New Rule: replace a roof, you are able to recover as a loss the remaining basis of the old roof, book the new roof and depreciate it

26 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Background Section 263(a) (relating to the capitalization requirement) states that no deduction is allowed for: (1) Any amount paid out for new buildings or permanent improvements or betterments made to increase the value of any property, or (2) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made.

27 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Background 263(a) Regulations state that capital expenditures include amounts paid or incurred to:  Add to the value, or substantially prolong the useful life, of property owned by the TP; or,  Adapt the property to a new or different use.  Amounts paid or incurred for incidental repairs and maintenance of property (as defined by 162 and § (relating to the deduction for ordinary and necessary trade or business expenses) are not capital expenditures under §1.263(a)-1.

28 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here U.S. Courts on Capitalization Have Recognized the highly factual nature of determining whether expenditures are for capital improvements or for repairs Articulated a number of ways to distinguish between deductible repairs and non-deductible capital improvements. Explained that R and M expenses are incurred for the purpose of keeping property in an ordinarily efficient operating condition over its probable useful life for the uses for which the property was acquired. Explained that capital expenditures, in contrast, are for replacements, alterations, improvements, or additions that appreciably prolong the life of the property, materially increase its value, or make it adaptable to a different use

29 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here U.S. Courts on Capitalization Have Explained that the relevant distinction between capital improvements and repairs is whether the expenditures were made to “put” or “keep” property in efficient operating condition Stated that if the expenditure merely restores the property to the state it was in before the situation prompting the expenditure arose and does not make the property more valuable, more useful, or longer-lived, then such an expenditure is usually considered a deductible repair. Concluded that a capital expenditure is generally considered to be a more permanent increment in the longevity, utility, or worth of the property. Key is that TR have attempted to match or meet these “elements” outlined in those court cases ….

30 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here TPR Regulations Do Not Change §263(a), which requires TPs to capitalize amounts paid to improve tangible property and §263A and the regulations under §263A, which require TPs to capitalize the direct and allocable indirect costs, including the cost of materials and supplies, to property produced or to property acquired for resale § , which requires TPs to include in inventory certain materials and supplies

31 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here TPR Regulations Do Adopt and Refine 1. The definition and treatment of materials and supplies 2. New de minimis safe harbor rules for the acquisition and production of property and/or material & supplies 3. An election to capitalize materials and supplies and/or R & M 4. Safe harbor for routine maintenance for both tangible personal property and buildings 5. Rules for determining a unit of property 6. Certain rule revisions for determining whether there has been an improvement to a unit of property 7. Rules revisions for determining whether an amount is paid for an improvement to a building. 8. Rule revisions for determining whether an amount is paid for the replacement of a major component or substantial structural part of a unit of property

32 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here TPR Regulations Do Adopt and Refine 9. Expanded definition of disposition for MACRS to include the retirement of a structural component (loss recognition availability for partial building disposals) 10. The general rule that incidental materials and supplies (for which no inventories or records of consumption are maintained) are deductible in the year purchased 11. Statements that non-incidental materials and supplies are not deductible until the year in which they are used or consumed in the TP's operations, unless the new safe harbor de minimis is applied) 12. New rules for rotable and temporary spare parts 13. No longer a need for TPs to understand General Asset Groupings 14. Numerous new and revised examples

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Material and Supplies

34 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Definition of Material and Supplies TPRs define and expand the definition of materials and supplies as tangible property that is used or consumed in the TP’s operations, not constituting a UoP, not acquired as part of a single UoP, and is not inventory, and that: 1.Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the TP and that is not acquired as part of any single unit of tangible property; 2.Consists of fuel, lubricants, water, and similar items, that are reasonably expected to be consumed in 12 months or less, beginning when used in TP's operations; 3.Is a UoP that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the TP's operations;

35 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Definition of Material and Supplies 4.Is a UoP that has an acquisition cost or production cost (under Section 263A ) of $200 or less (or other amount as identified in published guidance in the Federal Register or in the IRB; or 5.Is identified in published guidance in the Federal Register or in the IRB as materials and supplies for which treatment is permitted 6.Also provide an election to treat certain materials and supplies under the de minimis safe harbor rule 7.Allow a TP to elect to capitalize certain materials and supplies. 8.Redefine the first category of materials and supplies by further describing the types of components that qualify and by

36 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Definition of Material and Supplies Specified acquisition or production cost threshold  Final TPRs up the limitation to $200 per item (but only if the taxpayer files method change #186 or #187)  Add language, however, that gives the IRS and the Treasury Department the flexibility to change the amount of the limitation  A TPR with either applicable financial statements (AFS) or at least a written communicated policy will be permitted to deduct amounts paid for property up to $5,000 and $500 respectively if it complies with the new method change requirements and elects annually to write off on books and tax these amounts. Adds a new definition for “standby emergency spare parts”

37 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Election to Capitalize Material and Supplies A TP may elect to treat as a capital expenditure and to treat as an asset, subject to depreciation, the cost of any M and S Election applies to amounts paid during the taxable year to acquire or produce any M or S. Any asset for which this election is made shall not be treated as a M or S. Exceptions. A TP may not elect to capitalize i.Any amount paid to acquire or produce a M or S if: ii.The M or S is intended to be used as a component of a unit of property and iii.The TP has not elected to capitalize and depreciate that unit of property; or ii.Any amount paid to acquire or produce a rotable or temporary spare part if the TP has applied its optional method of accounting

38 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Election to Capitalize Material and Supplies A TP makes the election by capitalizing the amounts in the taxable year the amounts are paid and by beginning to depreciate them If a pass-through entity, the election is made at the entity level A TP must apply the de minimis safe harbor to amounts paid for all M & S, except for those M & S that the TP elects to capitalize and depreciate

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] De minimis Safe Harbor (DMSH)

40 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here DMSH  Final - (can apply to 2012 and 2013 but generally can elect 2014 and after) de minimis safe harbor:  There is no ceiling as to the amount that can be deducted if it fits in the DMSH amounts  Must make an annual election on the tax return  Safe harbor determined at invoice item level, but same on policies for books and records  If you have an audit, TP may rely on DMSH only if the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice.  If no audited financials, generally DMSH is $500 per invoice/items 40

41 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here DMSH The de minimis safe harbor has been expanded to include amounts paid for property having an economic useful life of less than 12 months. A $500 per item de minimis rule is also included for taxpayers without an AFS, but still have to have accounting procedures in place to deduct amounts paid for property costing less than a specified amount, or amounts paid for property with a life of 12 months or less If cost exceeds $500 per invoice, no portion will qualify for the safe harbor 41

42 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here DMSH The de minimis safe harbor does not preclude a TP from reaching an agreement with the IRS that the IRS examining agents will not review certain items. Examining agents do not need to revise their materiality thresholds in accordance with the safe harbor limitations. The DMSH is elected annually by including a statement on the TP's tax return for the year elected. An election to use the safe harbor may not be made through the filing of an application for change in accounting method, it must be made on the return when filed 42

43 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here DMSH If an invoice includes amounts paid for multiple tangible properties and the invoice includes additional invoice costs related to the multiple properties, then the taxpayer must allocate the additional invoice costs to each property using a reasonable method The DMSH must be applied to all eligible M & S (other than rotable, temporary, and standby emergency spare parts subject to the election to capitalize or to rotable and temporary spare parts subject to the optional method of accounting for such parts) if the TP elects the DMSH 43

44 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here DMSH TPs that do not elect the de minimis safe harbor must treat amounts paid for materials and supplies in accordance with Reg. § TPs subject to 263A can not avoid those provisions by using the DMSH Safe harbor does not apply to inventory, land, items it capitalizes, and the optional method of rotable parts Safe harbor is deducted as ordinary and necessary expense 44

45 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here De minimis Rule Election Details … of the de minimis safe harbor election: Note that the TPRs do not state that the “election” of the safe harbor de minimis rule is a method of accounting That means that a TP can elect to apply the de minimis rule in one year and not the next The DMSH cannot be applied to past tax years

46 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Applicable Financial Statements Defined as: TP’s FS that has the highest priority. The FS are, in descending priority: A.A FS required to be filed with the SEC; B.A certified audited FS that is accompanied by the report of an independent CPA, that is used for: 1)Credit purposes; 2)Reporting to shareholders, partners, or similar persons; or 3)Any other substantial non-tax purpose; or C.A FS (other than a tax return) required to be provided to the federal or a state government or any federal or state agencies (other than the SEC or the Internal Revenue Service).

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Improvements

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Amounts Paid to Improve Tangible Property - Reg. §1.263(a)-3(d) Requirement to capitalize amounts paid for improvements A TP generally must capitalize the related amounts paid to improve a unit of property owned by the TP. For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the TP-- (1) Are for a betterment to the unit of property (2) Restore the unit of property or (3) Adapt the unit of property to a new or different use 48

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Special rules for determining improvement costs— Reg. §1.263(a)-3(g) Removal Costs—  If a TP disposes of a depreciable asset, including a partial disposition under Prop. Reg. §1.168(i)-1(e)(2)(ix), and has taken into account the adjusted basis of the asset or component of the asset in realizing gain or loss, then the costs of removing the asset or component are not required to be capitalized  If the taxpayer wants to deduct removal costs, it must file a new 3115 for this method 49

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Special rules for determining improvement costs— Reg. §1.263(a)-3(g) Removal Costs—  If a TP disposes of a component of a unit of property, but the disposal of the component is not a disposition, then the TP must deduct or capitalize the costs of removing the component based on whether the removal costs directly benefit or are incurred by reason of a repair to the unit of property or an improvement to the unit of property. 50

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] New Building Safe Harbor for Small Taxpayers

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Safe harbor for small taxpayers— Reg. §1.263(a)-3(h) (SHST) Certain TPs may elect to not apply the capitalization requirements to an eligible building property if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building property does not exceed the lesser of— (i) 2 percent of the unadjusted basis (as defined under paragraph (h)(5) of this section) of the eligible building property; or (ii) $10,000. “amount paid” do not include items capitalized under de minimis safe harbor or those amounts deemed not to improve under the safe harbor for routine maintenance 52

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] SHST Qualifying taxpayer— (i) In general - the term qualifying TP means a TP whose average annual gross receipts for the three preceding taxable years is less than or equal to $10,000,000. Rules for TPs in existence for less than 3 years Short year – annualize 53

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Safe Harbor for Routine Maintenance

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Safe harbor for routine maintenance- Reg. §1.263(a)-3(i) (must file #184 and cite this) An amount paid for routine maintenance (RM) on a unit of tangible property, or in the case of a building, on any of the properties is deemed not to improve that UoP RM for a building is the recurring activities that a TP expects to perform as a result of the use to keep the building structure/system in its ordinarily efficient operating condition. RM activities include, the inspection, cleaning, and testing of the building structure or each building system, and the replacement of damaged or worn parts with comparable and commercially available replacement parts. RM may be performed any time during the useful life of the building structure or building systems. 55

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] RMSH Timing The activities are routine only if the TP reasonably expects to perform the activities more than once during the 10-year period beginning when placed in service Factors to be considered in determining whether maintenance is routine and whether a taxpayer’s expectation is reasonable include the recurring nature of the activity, industry practice, manufacturers’ recommendations, and the taxpayer’s experience with similar or identical property. With respect to a taxpayer that is a lessor of a building or a part of the building, the taxpayer’s use of the building unit of property includes the lessee’s use of its unit of property. 56

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Betterments

58 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Capitalization of betterments - Reg. §1.263(a)-3(j) Elements/Requirements An amount is paid for a betterment to a unit of property only if it--  Ameliorates a material condition or defect that either existed prior  Is for a material addition, including a physical enlargement, expansion, extension, or addition of a major component to the unit of property or a material increase in the capacity  Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output 58

59 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here How to Apply Betterments Criteria Application of betterment rules: The applicability of each quantitative and qualitative factors depends on the nature of the unit of property. For example, if an addition or an increase in a particular factor cannot be measured in the context of a specific type of property, that factor is not relevant in the determination An amount is paid to improve a building if it is paid for an increase in the efficiency of the building structure or any one of its building systems (for example, the HVAC system). 59

60 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Betterments Comparison Appropriate comparison - In cases in which an expenditure is necessitated by normal wear and tear or damage to the unit of property that occurred during the TP’s use of the unit of property, the determination of whether an expenditure is for the betterment of the unit of property is made by comparing the condition of the property immediately after the expenditure with the condition of the property immediately prior to the circumstances necessitating the expenditure. 60

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Restorations

62 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Restorations 1.263(a)-3(k) Elements An amount is paid to restore, and therefore improve, a UoP if it: 1. It returns the UoP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and was no longer functional for its intended use; 2. It is rebuilding to like-new condition: results in the rebuilding of the UoP to a like-new condition after the end of its class life (brought to the status of new, rebuilt, remanufactured, or similar status under the terms of any federal regulatory guideline or the manufacturer’s original specifications); or

63 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here More Restorations Criteria  Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;  rebuilding of the unit of property to a like- new condition after the end of its class life  Is for the replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a unit of property 63

64 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Summary of Examples Restorations Examples where items were written off: Rebuild freight cars before the end of their class life Repair a broken taillight, replace a power switch assembly Waterproof roof membrane Two out of eight HVAC units, two out of twenty sinks, and 30 out of 300 windows, wood flooring in hotel lobby

65 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Summary of Examples Restorations Examples where items were capitalized: Shore up the walls and replace siding, 200 of 300 windows Rebuild freight cars after the end of their class life New engine and cab of a tractor, also paint the tractor cab Underground tank removal and replace Entire roof, and significant portion of a roof Furnace replacement, the one HVAC system, also sprinkler system in a building Wiring throughout the building; plumbing fixtures in all of the restrooms; all of the floors in the public areas of the hotel Remodel hotel over several-year period

66 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Amounts to Adapt Property to a New or Different Use 1.263(a)-3(l) TP must capitalize amounts paid to adapt a unit of property to a new or different use. Amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the TP’s intended ordinary use of the unit of property at the time originally placed in service by the TP. In the case of a building, an amount is paid to adapt the UoP to a new or different use if it adapts to a new or different use any of the properties designated in paragraphs (e)(2)(ii)(building structure and systems), (e)(2)(iii)(B)(condominium), (e)(2)(iv)(B)(cooperative), or (e)(2)(v)(B) (leased building) of this section.

67 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Checklist of Improvements Betterment Considerations: Does routine maintenance safe harbor apply? Does it ameliorate a pre-existing material condition or defect? Does it ameliorate a material condition or defect prior to placing the property in service? Does it result in a material increase in capacity, productivity, efficiency, quality, etc. of UoP? Does it adapt to a new or different use? Does Section 263A apply to the expenditure(s)? If the answer to any of the above questions is YES, then the expenditure has to be capitalized …

68 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Checklist of Improvements Restoration Considerations: Is the UoP no longer functional and did you return it to ordinary efficient or operating condition? Did you rebuild the UoP to a like-new condition after its useful life? Did you replace a major component or substantial structural part? Was the component previously deducted as a loss, before you replaced it? Was the component previously sold or exchanged before replacement? Was the expenditure to the UoP previously taken as a casualty loss? If the answer to any of the above questions is YES, then the expenditure has to be capitalized …

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Accounting Method Change Rules

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Accounting Method Changes for Reg. §1.263(a)-3 Other than the new annual elections (such as for DMSH or SHST) taxpayers must file IRS form 3115 to comply with these new choices. The new regulations generally require a change in method of accounting to which the provisions of sections 446 and 481 and the accompanying regulations apply. Changes generally apply to taxable years on or after , except for (h) the safe harbor for small taxpayers, (m) the optional regulatory method, and (n) the election to capitalize R & M apply to amounts paid on or after A TP may choose to apply DMSH and/or SHST to amounts paid in taxable years beginning on or after January 1,

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Disposition Rules

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Disposition Rules for MACRS Structural Components. The final MACRS TPR regulations state that a building (including its structural components), a condominium (including its structural components), or a cooperative (including its structural components) is the asset for disposition purposes. 72

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Disposition Rules for MACRS – Loss Choice Structural Components. This rule change allows TPs to chose to take or forgo a loss upon the disposition of a structural component of a building. A TP desiring to claim a loss on a retired structural component is required to make a “partial disposition election” PAD (this is a new term). A PAD for the current tax year is an election PADs for prior tax years are a 3115 method filing and can only be done until tax year

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] Partial Dispositions - PADs The TPRs allow a TP to claim a loss upon the disposition of a structural component (or a portion thereof) of a building of any other asset (a "partial disposition" of an asset) without identifying the component as an asset before the disposition event by making a partial disposition election. While the partial disposition rule is generally elective, the rule is required to be applied to: Disposition due to casualty event Disposition of a portion of an asset for which gain is not recognized in whole or part under 1031 or 1033 Sale or transfer of a portion of an asset 74

75 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here MACRS Definition of Disposition Occurs when ownership of the asset is transferred; or, Asset is permanently withdrawn from use either in the taxpayer’s trade or business or in the production of income; Includes the sale, exchange, retirement, physical abandonment, or destruction of an asset; Also includes the retirement of a structural component of a building (defined by ); and, Finally, when an asset is transferred to a supplies, scrap, or similar account. Manner of Disposition—does not matter.

76 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here How to Determine Basis or Identification of Disposed or Converted Asset Where it is impracticable from the TP’s records to determine the unadjusted depreciable basis of the disposed-of asset, the TP may use any reasonable method that is consistently applied to the taxpayer’s general asset accounts, multiple asset accounts, or larger assets. 76

77 Capitalization of Tangible Assets XXXXXXX CPA Firm for {Client Name] Put firm logo here Basis and Identification of Disposed or Converted Asset (slide 2) The PRs provide some comprehensive examples of reasonable methods, including: (1) discounting the cost of the replacement asset to its placed-in-service year cost using the CPI (for 2013) or PPI for 2014 and after; (2) a pro rata allocation of the unadjusted depreciable basis based on the replacement cost of the disposed-of asset and the replacement cost of all of the assets, as applicable; and/or (3) a study allocating the cost of the asset to its individual components. 77

 Put firm logo here Capitalization of Tangible Assets XXXXXXXX CPA Firm Name for [Client Name] CONCLUSION Put Client Name or Logo here