Pub. 4 2015 Issue 1

19 S P R I N G | 2015 these new regulations are not adopted, under audit, the Bank risks permanent loss of all deductions related to the applicable assets, including prior and future depreciation deductions. Even though many banks may not be as concerned about the timing of when tax is due as long as they get the deduction, a permanent difference will not only impact the bank’s current effective tax rate but could cost the bank permanent future tax deductions. On February 13, 2015, the IRS provided some relief to “small businesses” regarding these complex regulations. A small business is a taxpayer with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior 3 taxable years. Unfortunately, this will only ap- ply to a very few banks. A Change in Terminology Perhaps the biggest obstacle to overcome in understand- ing the new regulations is interpreting the new terminology that will distinguish a repair from what is deemed to be an “improvement.” An improvement is defined as a betterment, a restoration, or adapting an item to a new use. This will re- quire subjective judgment and perhaps a more in-depth analy- sis by the taxpayer before reaching a definitive conclusion. In addition, materials and supplies will face a more rigorous evaluation as to their cost, utilization, and economic life before they can be expensed. Another key term in the regulations is the definition of the “unit of property.” The improvement tests must be ap- plied to each individual unit of property. Although it seems simple enough, each unit of property is deemed to consist of all components that are “functionally interdependent.” Two separate examples are a car and a building. A car, its engine, tires, and brakes could be considered a single unit of prop- erty as all of its components is interdependent on each other. However, a building unit of property is the building structure. The building should be further examined for the systems that perform discrete and unique functions that should be their own units of property. Those systems include HVAC, plumb- ing, electrical, escalators or elevators, fire and security systems, and gas distribution systems. Certain routine maintenance safe-harbors will be available for items that would otherwise be an improvement but are incurred more than once over the class life of the asset (or 10 years for buildings). New Elections Available In an attempt to lessen the administrative burden on the taxpayer, the regulations provide for certain “safe-harbor” elections that can be made annually with a timely filed tax return. For example, a de minimis election is available to expense items on a single invoice up to a maximum of $5,000 if the taxpayer has an applicable financial statement (audited or provided to the SEC or a state or federal government agency). Accounting Method Changes The first-year implementation of these regulations will require the filing of at least one Form 3115 for most taxpayers. These changes should be automatic (not requiring a user fee); however, could result in favorable or unfavorable adjustments. Some provisions can be applied prospectively using the cut-off method and will not require an adjustment. Multiple accounting method changes could be necessary depending on the scope and nature of the entity’s operations. Although there will be additional filing requirements, these regulations provide a unique “one-time” opportunity for many businesses to write-off items that were previously capitalized. This article has just touched the tip of the iceberg as it re- lates to the vast changes associated with the new TPRs. If you haven’t had a conversation with your tax team yet, it is not too late. I strongly encourage you to reach out and ask for guid- ance as to how these rules affect your financial institution. David is a principal at Yount, Hyde & Barbour serving on the financial institutions team. He is a tax specialist and works in depth with his clients, concentrating on banks. David has been trained to be a business mentor and coach pro- viding advanced levels of strategic planning. He also consults with management on a wide array of day to day affairs including mergers and acquisitions and develop- ing growth and exit strategies. David can be reached at david. henning@yhbcpa.com . Keith Barnett ( 717) 525-1324 • keith@protectmybank.com www.protectmybank.com Endorsed by: Get your Information Security Program on TRAC TRAC is a web-based automated information security tool suite which will guide the bank towards a sound information security program and a successful IT exam. Modules include: • IT Risk Assessment • Third Party Management • Enterprise Risk Management • & More! BY THE NUMBERS