Spring 2013 issue of Horizons

CONSTRUCTION

The amounts subject to these regulations can be classified into two primary categories:

∙ Costs to improve tangible property

∙ Costs of materials and supplies

Costs to Improve Tangible Property The primary priority for construction companies is to determine if expenditures made to tangible property are to be expensed or capitalized. Under the new regulations, a taxpayer generally must capitalize the aggregate of amounts paid to improve a unit of property owned by the taxpayer. In order to determine if the expenditure must be capitalized, one must first define the unit of property and then determine if an improvement has been made.

In addition, taxpayers may be able to write off the net tax value of certain previously capitalized assets (e.g., roof costs that were previously capitalized may now have their net tax value written off when a roof improvement is or was subsequently made). The provisions contained in the act are worth a closer look. Informed construction company owners and their finance professionals are taking steps now to ensure proper allocation and record-keeping surrounding all aspects of their real property in order to take advantage of financial opportunities within the new law. New Rules In December 2011, the IRS issued temporary regulations that provided guidance on the application of Code Section 162(a) and Code Section 263(a) to amounts paid to acquire, produce, or improve tangible property. While originally intended to be effective for tax years beginning on or after January 1, 2012, the effective date was delayed to tax years beginning on or after January 1, 2014, with the taxpayer’s option to adopt favorable components of the regulations earlier.

What is a Unit of Property? The definition of unit of property depends on the property type. The new law provides the definition of unit of property for:

∙ Building

∙ Plant property

∙ Network assets

∙ Leased property other than buildings

∙ Other property

Although many construction companies do not own buildings, plant property, or network assets, the contractors and architects will be called upon by customers to provide technical drawings and cost information regarding the above units of property and their components to assist them in complying with these new regulations. Building A building is defined as any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose

page 28 | horizons Spring 2013