By Karen Dunn, JD, LLM and Amber Busch, CPA
With all the hubbub among accountants about the new tangible personal property regulations, should exempt organizations be concerned, or is it, for them, much ado about nothing?
If you haven’t heard the scuttlebutt, these regulations provide long-awaited guidance on capitalization or expensing of improvements and purchases. The rules are complex, and their impact the business world is widespread. And yes, they do apply to exempt organizations. Specifically, the tangible personal property regulations (TPRs) can be advantageous to organizations that have unrelated business income (UBI) or a for-profit subsidiary.
Under the TPRs certain organizations may expense de minimis amounts paid for tangible personal property, up to $5,000 per item or invoice. This can be a significant tax saving if the organization has taxable income. If your organization does not, this may be much ado about nothing for you.
See Capitalizing on the De-minimis Exception for some of the basics of the de minimis rule.
If you have taxable income, a $5,000 expense threshold on tangible personal property is not too shabby. So, this is indeed much ado about something. However, if the organization does not have applicable financial statements, the de minimis amount is $500, rather than $5,000, not much of a savings.
To qualify for the $5,000 de minimis exception you must have a written capitalization policy and an applicable financial statement (AFS), which is defined as follows:
1. A financial statement filed with the Securities and Exchange Commission;
2. A certified audited financial statement; or
3. A financial statement required to be provided to the federal or state government or agency (other than the SEC or IRS)
But pay attention – there is a safe harbor election for small organizations that may also be much ado about something. If the safe harbor requirements are met, the cost of the improvement or similar costs may be deducted and does not need to be capitalized. “Small organization” is defined as follows:
- Average annual gross receipts for the prior three years is less than $10 million; and
- The organization owns or leases building property with an unadjusted basis of less than $1 million; and
- The total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property doesn’t exceed the lesser of-
- Two percent of the unadjusted basis of the eligible building property; or
- $10,000; and
- An election is made to use the safe harbor for each taxable year in which qualifying amounts are incurred.
The election is made by attaching a statement to your income tax return for the taxable year. This is not a change in method of accounting and so a Form 3115, Application for Change in Method of Accounting, is not required.
There is currently no guidance regarding whether the $10 million small business threshold refers to the entire organization or just its unrelated businesses. Practitioners in the field believe this applies to the entire organization and not just its unrelated businesses, but we await further IRS guidance.
What should an exempt organization do? Is this much ado about nothing, or something to consider? Exempt organizations that have UBI or for-profit subsidiaries and do not meet the small business safe harbor should balance the admin burden of tracking fixed assets with the benefit afforded by accelerating deductions. See Top Five Things You Need To Know. If such exempt organization finds that the benefit outweighs the administrative burden, they should discuss with their CPA the appropriate method to comply with the TPRs. This will be done by either filing Form 3115, Application for Change in Method of Accounting or by applying the rules prospectively through the use of Rev. Proc. 2015-20.
The new rules are very complex. Please talk with your tax advisor to see if and how these rules will affect your organization. Then your board, finance committee, or CFO can decide if it is much ado about nothing or is indeed something important for your organization.
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