• Significant Benefits for C-Store Owners
• Time Sensitive Action Required
• Consult your tax advisor to make sure they are well-versed in these new regulations
C-store owners often struggle with how to handle real and tangible property for income tax purposes. Common questions asked are “how should we account for costs relating to real and personal property that we own? Can those costs be deducted currently for tax purposes, or must we capitalize them and depreciate them over a certain period of time? If so, over what period of time must we depreciate these costs, and how should the annual depreciation expense be calculated?”
“It depends on the facts and circumstances”, says Steven Murphy, Tax Partner / Convenience Store Industry Practice Leader, Moore Colson. “The general rule has always been that purchases of new property should be capitalized and depreciated. However, it has always been somewhat of a gray area with respect to subsequent expenditures incurred with respect to the same property”. Many taxpayers take the position that costs relating to repairs & maintenance or materials & supplies are deductible, whereas costs that result in improvements to property owned should be capitalized and depreciated.
For C-Stores that own their real property and/or have leasehold improvements, these costs can be quite significant. Typically, a taxpayer would prefer to deduct these costs as quickly as possible. The IRS has often taken the contrary position and has argued for capitalization of costs, recoverable only through depreciation deductions over an extended period of time. Needless to say, the lack of clarity has been the subject of much unsettled controversy between taxpayers and the IRS over the years, often resulting in litigation. After years of litigation, the IRS decided to clarify its positions by drafting new regulations, the purpose of which was to clarify the capitalization requirements, simplify prior rules, and to achieve results consistent with case law. In the most basic sense, the IRS is trying to match the principles and findings of the courts.
The “final” Tangible Property Regulations were issued by the Internal Revenue Service on September 13, 2013 and provide some clarity for C-Store owners with respect to expenditures relating to their real property and personal property. These final regulations become effective for all taxpayers on January 1, 2014. However, taxpayers were given the option of adopting either the previously issued temporary regulations or the final regulations early (for either 2012 or 2013). Nevertheless, all taxpayers must be in compliance with the final regulations in 2014.
There are many taxpayer-friendly provisions in these regulations, including the following:
• The ability to deduct expenditures for the replacement of major components of building structures/systems as repairs if the percentage replaced isn’t significant, or is replaced often enough to be considered routine maintenance.
• The option to deduct a loss for partial disposal of the original building attributable to major components that have been replaced, where capitalization of the replacement is required.
• The ability to retroactively claim deductions and losses for previous tax years as if the Final Regulations had always been in effect.
• The new de minimis safe harbor deduction, allowing taxpayers to deduct expenditures for which the per-unit cost is $500 or less ($5,000 or less if the company has audited financial statements), provided that such costs are treated as expenses on the company’s books. However, an official written company policy must be in place at the beginning of the fiscal year to take advantage of this rule.
The window for early implementation in 2013 is quickly coming to a close, as the extended due date to file 2013 calendar year business tax returns is September 15, 2014.
Most of the favorable provisions in the Tangible Property Regulations can be fully realized regardless of whether taxpayers adopt them early (for 2013) or by the mandatory adoption date for tax years beginning on or after January 1, 2014; one possible exception to this is the ability to retroactively claim a loss for partial disposition of the original building with respect to subsequent replacements of structural components. Taxpayers that opt for early adoption in 2013 can claim a partial disposal loss for structural components that were replaced in previous tax years. Unless the IRS chooses to extend the retroactive partial disposal option to 2014, this provision may only be available if the C-Store adopts these Regulations in 2013. As of the date of this article, the IRS has not issued official guidance allowing for a retroactive claim after the 2013 tax year.
For example, a C-Store that purchased a building in 2008 for $1,200,000 and replaced the roof in 2010 for $50,000 was required to capitalize the new roof and was not allowed to write off any portion of the original $1,200,000 building that was attributable to the original roof. Effectively, the owner has been simultaneously depreciating two roofs (one of which no longer exists).
If the owner of that C-Store chooses to adopt the final Tangible Property Regulations in 2013, a portion of the original building (purchased in 2008) attributable to the original roof (that was replaced in 2010) can be written off as a loss and deducted in 2013. Once a C-Store adopts the final Tangible Property Regulations, all of these provisions can be taken advantage of prospectively. If the C-Store in the previous example had instead replaced its original roof in 2014, a partial disposal loss for the original 2008 building could then be claimed on the 2014 return.
“Implementation of these complex regulations is likely to be a major undertaking, but the benefits should far outweigh the cost”, says Mike Elliot, Real Estate Industry Practice Leader / Tax Partner. Moore Colson. “It would be wise for C-Stores to begin planning for implementation of these regulations as soon as possible”. In most cases, taxpayers will need to file applications to change their present accounting methods with the IRS, in order to implement these new regulations and to be in compliance with them as of the date adopted. The effective date of adoption must be no later than January 1, 2014.
Please be sure to consult your tax advisor to make sure they are well-versed in these new regulations and how they may benefit you, whether you choose to adopt them early for your C-Store, or as of the January 1, 2014 mandatory implementation date.
Moore Colson & Co.
1640 Powers Ferry Road, Bldg. 11, Suite 300, Marietta, GA 30067