Sampling to efficiently implement the new tangible property regulations: the clock is ticking.

• Author: Rotz, Wendy

Implementing the new tangible property regulations can be a daunting task for any tax department--large or small. The new tangible property regulations apply to all current and certain prior-year tangible assets, creating both massive compliance efforts and potentially huge opportunities for immediate and long-term tax savings.

Given the organizational effort necessary to implement the tangible property regulations, deadlines for compliance are closer than one may think. The regulations generally are effective for tax years beginning on or after Jan. 1, 2014. This means that the regulations must be implemented and the change in accounting method Form 3115, Application for Change in Accounting Method, must be filed no later than with the 2014 tax return. Additionally, the one-time retroactive election for partial dispositions of tangible assets in prior years can be made only for tax years beginning before Jan. 1, 2015. This onetime opportunity will be a large benefit to many U.S. companies.

Similarly, the new rules for determining repairs vs. improvements are another area of the tangible property regulations where many taxpayers may find a large benefit by accelerating tax deductions rather than depreciating improvements over long recovery periods. Those that do not make the retroactive election for prior-year partial dispositions or take advantage of the new repair deduction rules could be locking themselves into less advantageous tax treatment for years to come. With the clock ticking, how can all the necessary tangible property tax work get accomplished by the 2014 filing?

Sampling Is Practical

Statistical sampling and estimation is an efficient means of tackling the tangible property compliance efforts and potentially gaining some tax benefits along the way. It can be used in the short term to address the compliance efforts, but also currently and going forward for further efficiencies and tax benefits in future years.

The IRS not only accepts estimates derived from proper statistical sampling, but also in many cases the IRS suggests it--specifically in the implementation of the new tangible property regulations. Current applicable IRS revenue procedures pertaining to sampling include: Rev. Proc. 2011-42, which contains criteria for acceptance of taxpayer-conducted samples and provides safe-harbor statistical methods--subsequent revenue procedures listed below point back to this procedure for statistical methods; Rev. Proc. 2011-43...