Tangible Property and Disposition Regulations

Last week, we presented a webinar on the final regulations related to the capitalization and disposition of tangible property. Restaurants are required to comply with these regulations for tax years beginning on or after January 1, 2014, so we covered the following topics to ensure attendees walked away from the webinar with a basic understanding of the rules and how to implement them properly:
  • Overview of IRS Guidance: The Retail/Restaurant Industry Issue Resolution is expected to be issued soon and will benefit the industry by allowing restaurants to elect a safe harbor for qualifying remodel expenditures.
  • Restaurant De Minimis Safe Harbor: The IRS has set two different safe harbor amounts for capitalization policies depending on whether or not you have an Applicable Financial Statement. Every business entity should have a capitalization policy in place and be applying it correctly. The new safe harbor rules allow you to use a “per invoice” or “per item as supported by an invoice” methodology, so take care to ensure the per-item rules are being applied correctly. Common questions on this topic include, “Do book and tax policies have to be the same?”, “Can my tax threshold be higher than my book?” and “What if I use an amount higher than the de minimis safe harbor amount?” For answers to these common questions, check out the webinar recording.
  • Restaurant Repairs: Unit-of-property (UOP) rules can be used as a starting point to evaluate whether or not  specific property improvements must be capitalized. Typically, an expenditure should be capitalized if it results in the betterment, restoration or adaptation to a new or different use. Examples of such restaurant repairs include the replacement of damaged ceiling tiles or resurfacing an existing parking lot.
  • Restaurant Dispositions: The new regulations allow the removal of old assets from your depreciation schedule when replacement assets are placed into service. Previous rules for tax required restaurants to keep old assets on even when new ones were acquired (such as replacing a roof). The regulations provide options to determining the cost of the old asset if it was grouped with other “building” assets. It's important to note that time is running out to dispose of items that were removed from service in 2014 and previous years. 
  • Other Considerations: There are a number of additional considerations that restaurants should be aware of related to repair and disposition reviews. These items include making corresponding changes to Alternative Minimum Tax (AMT), the impact of IRC section 263A relating to capitalization of otherwise deductible costs incurred by reason of an improvement, and IRC section 110 relating to tenant improvements.

If you missed the webinar, click here to access the recording.

For more information on tangible property and disposition regulations as it applies to restaurants, contact Phil Hofmann at phofmann@bdo.com or jtubaugh@bdo.com, and keep up with the Practice’s latest thoughts by following us on Twitter at @BDORestaurant.