Accounting for fixed assets places a significant burden on the corporate tax function. Tax departments invest a tremendous number of staff hours tracking fixed assets and grappling with constantly shifting rules and regulations. This already difficult situation was compounded by the release of the tangible property regulations effective for tax years beginning in 2014 and after.
A statistical sampling analysis can ease the process by reducing the number of fixed assets that need to be analyzed in detail. A sample of a few hundred assets may be used to estimate tax values for thousands of assets. The IRS not only accepts statistical sampling but encourages it in evaluating tangible property. (See Rev. Proc. 2011-42 for the statistical methodology taxpayers may use to estimate values for federal tax returns. In addition, tangible property revenue procedures that cite sampling solutions include Rev. Procs. 2011-43,2012-19, 2012-20, 2014-16, 2014-17, 2014-54, and 2015-20.)
In a tangible property regulations study, a number of accounting methods and elections may be considered, some of which require filing Form 3115, Application for Change in Accounting Method. Commonly, these include changes in depreciation recovery periods and repairs and maintenance items deductible for tax purposes. Further, the tangible property regulations allow a taxpayer to elect to recognize the remaining basis upon a partial disposition of an asset, as well as for the corresponding removal cost--which can be deducted in the year of disposition. An efficient study may include all four.
In a tangible property regulations study using sampling, the scope of the study is established by targeting the assets with potential benefit. For efficiency, these assets are grouped into strata, or "buckets," and sampled separately. Tax determinations are made on only the sample items, and these results are used to extrapolate the total benefit for all of the targeted assets, not just the sampled ones.
Incorporating Estimated Values Into the Fixed-Asset Listing
Once the statistical sample yields estimated results, the next step is to incorporate those estimated values into the existing fixed-asset listing. Early planning can streamline and facilitate implementation into the fixed-asset software package. This item discusses common industry solutions for updating the fixed-asset listing after sampling and best practices to consider when planning a tangible property regulations sample.
End-Stage Updating the Fixed-Asset Listing: The Basics
While it is somewhat circular, envisioning the fixed-asset updates at the end guides the planning and designing at the beginning--long before a single sampling unit is ever pulled. This item examines two basic approaches. By this point in a study, the sample has been pulled, analysis of the sampled records has been completed, and total amounts to recategorize have been extrapolated. Now what?
Most approaches require driving down those overall total estimated extrapolated amounts to the individual asset level. That is, every asset in the targeted scope gets an allocated amount of the total estimate. For example, a sample may estimate that 80% of all capitalized roof...