IRS New Income Tax Regulations Make Property Tax Reporting More Complex
Effective for January 1, 2014, the new IRS “tangible property regulations” make changes for income tax purposes to how businesses capitalize or expense their acquisitions of tangible property. While taxpayers and their advisors have been dealing with the choices that must be made under the regulations for filing the 2014 federal and state income tax returns, attention must also turn to the reporting of assets for state and local property tax purposes for the 2015 reports that are being prepared as we write this.
Of major impact for property tax reporting is the regulations’ new “de minimus safe harbor election.” Under this provision, taxpayers can elect to deduct immediately, rather than capitalize and depreciate, certain amounts paid for tangible property. The threshold amounts depend on whether the taxpayer has “an applicable financial statement” (“AFS”) or not. Examples of an AFS include financial statements that are required to be filed with the SEC, and other financial statements that are accompanied by a CPA report such as those provided to a bank for a loan, or for reporting to shareholders, or those required to be provided to federal or state government agencies other than the IRS or the SEC.
Taxpayers that have an AFS may use the safe harbor to deduct amounts up to $5,000 per invoice or item.
Taxpayers that do not have an AFS may use the safe harbor to deduct amounts up to $500 per invoice or item.
The result of this election is that many taxpayers will be expensing rather than capitalizing many more of their asset acquisitions. Thus those assets will not be reflected in their balance sheets and fixed asset ledgers, the accounting records that are the starting point for preparing the personal property tax returns.
Many states and localities that impose personal property taxes, including Maryland, do not follow the income tax regulations in their requirements for the assets that are subject to property tax. Therefore taxpayers and their advisors will need to have procedures in place for identifying for property tax reporting purposes the asset acquisitions that were deducted and not reflected in the balance sheets.
For example, Maryland’s Form 1 instructions for Section III item D require that “All fully depreciated and expensed personal property must be reported on this return.”
Maryland’s State Department of Assessments and Taxation (SDAT) agreed. Michael Griffin, SDAT’s Associate Director, told Altus: “Maryland’s property tax law has not changed. We still require the reporting of expensed personal property items. The Form 1 also requires the taxpayer to check a box acknowledging whether or not they have reported all expensed property. We do send audit notices to those who check ‘no.’” See page 3 of the Form 1, Section III, item D.
Altus has also received confirmation from the Maryland Comptroller’s Office that Maryland is incorporating the new IRS regulations in the calculation of Maryland taxable income; there is currently no “decoupling” modification adjustment. Other states may or may not be similar.
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Patrick BroomeBroomebu-state-local-tax personal-property-tax-consultingpersonal-property-tax-commercial-real-estatepersonal-property-taxpersonal-property-tax-compliance-2hunt-valleyVice President, Property Tax
Last updated on September 5th, 2019 at 03:31 pm