As we enter 2016, we look back to 2015 as a year filled with a whirlwind of activity related to tangible property capitalization policies in the hospitality industry. Financial executives and tax accountants alike wrestled with unfamiliar terms such as Unit of Property, Form 3115, TPRs, and Partial Disposition Deductions. Taxpayers spent the year “scrubbing” their depreciation schedules and capitalization policies to comply with IRS tangible property regulations (TPRs) and, in many cases, reaped the benefits of one-time significant tax deductions. The effort was often great and the rewards were plentiful. For those who did not comply, there is still time to make changes in 2016 that could increase your after-tax bottom line.
The year 2015 also saw tax legislation, but not exactly the comprehensive tax reform we were promised. Congress remained stalemated on many issues, but both sides of the aisle were unified in their displeasure with corporate inversions whereby U.S.-based companies transferred their legal ownership outside the country to minimize their U.S. tax bill. At the same time, Congress took a “wait-and-see” attitude toward new international standards known as BEPS (Base Erosion Profit Shifting) Action Plan promulgated by the international body, OECD (Organization for Economic Cooperation and Development). This action plan is designed to make cross-border activity more transparent and to close perceived international tax loopholes. Although the United States is not regulated by the OECD, these new rules will severely affect worldwide structuring and intercompany transactions.
On a “same thing, year later” note, Congress acted late again on so-called tax extenders, creating havoc with year-end tax planning. Millions of taxpayers did not know whether tax incentives, such as bonus depreciation, increased Section 179 expensing, and research credits were available until the week of Christmas, a time during which many businesses wind down for the year. Suffice it to say, the late action will cause another confusing tax season for the IRS and the tax-filing public.
In our tax practice at PKF O’Connor Davies, we, as well as tax practitioners around the country, spent the year reviewing our clients’ capitalization policies and “scrubbed” their depreciation schedules to uncover tax write-offs sanctioned by the IRS TPRs. With our assistance, clients conducted TPR and cost segregation studies, prepared Form 3115 (IRS form for changing accounting methods), and adopted accounting policies to comply with and take advantage of IRS regulations .We anticipate that the IRS will review taxpayer compliance in 2016, so we are prepared for questions and controversy.
For taxpayers who did not comply, opportunities still exist to satisfy IRS rules with 2015 tax returns. Even taxpayers who met the “small business” exception and who chose not to consider the TPRs may rethink that decision and seek tax deductions still available.
The IRS ended the year with a nice increase in the de minimis expenditure write-off via a late year revenue procedure, which raised the de minimis safe harbor (DMSH) limit from $500 to $2,500 for expenditures normally required to be capitalized and depreciated over time. Now, taxpayers with no applicable financial statements (AFS) who have an accounting policy in place can elect to treat items of $2,500 or less, if substantiated, as deductible on a current basis. This is good news for these taxpayers because, generally speaking, an AFS is an audited financial statement.
The limit increase was the result of numerous comments from tax practitioners and industry representatives who suggested to the IRS that the previous limit of $500 was not useful and did not ease compliance, which was the stated intent of the DMSH. As a result, costs incurred after 2015 that meet the DMSH guidelines can be deducted without challenge by the IRS either in an examination or ongoing court decision.
Also in late 2015, the IRS sanctioned a safe harbor deduction for some retailers and restaurant operators who “refresh or remodel” their facilities.
This will be an interesting year; and for the 2016 tax season, there will be new standards for logging on to all tax software products, such as minimum passwords, new security questions, and standard lockout features. It will be another year of adjustments for American businesses. Hospitality executives need to be well informed on the changing tax and regulatory environment. Fasten your seat belts and get ready for a rocky ride.
Leo Parmegiani is a CPA and tax partner in the firm of PKF O’Connor Davies, a division of O’Connor Davies LLP, in New York City. www.odpkf.com