a practical guide to complying with final tangible property regulations

A PRACTICAL GUIDE
TO COMPLYING
WITH THE FINAL
TANGIBLE PROPERTY
REGULATIONS
White Paper
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A PRACTICAL GUIDE TO COMPLYING WITH
THE FINAL TANGIBLE PROPERTY REGULATIONS
Introduction
On September 19, 2013, the IRS issued the final tangible property repair regulations for
Sections 162(a) and 263(a), which modified and superseded the temporary regulations
issued on December 23, 2011. These regulations represent some of the most significant tax
law changes to affect businesses since the 1986 Internal Revenue Code overhaul.
1
Impacting nearly every business, the regulations provide taxpayers with a broad range of
guidance on whether to capitalize or expense amounts paid to acquire, produce, or improve
tangible property. Compliance with the regulations is required beginning with the tax year
that starts on or after January 1, 2014. To comply, most taxpayers will need to change their
processes for accounting for repairs.
Revising repair processes is not a trivial task as it requires taking a hard look at your tax and
accounting systems and procedures and devising ways to ensure accuracy, enforce policies,
reduce manual effort, and document facts and decisions.
This white paper can help you plan and prepare for the process and system changes
necessary for accurate and efficient compliance with the significant changes found in the
tangible property regulations. You’ll learn more about:
• Which repair processes are affected by the final regulations
• What types of changes need to be made to these processes
• How BNA Fixed Assets

™
from Bloomberg BNA can help you comply effectively and
efficiently

“The final regulations will affect all taxpayers that acquire, produce, or improve tangible property.”
–Preamble to the regulations, IRS, September 19, 2013

The Final Regulations Provide Additional Guidance
The final tangible property regulations have a long history. Following several court cases
involving repair and maintenance expenses for fixed assets, the IRS proposed amendments to
the regulations in 2006. The proposed amendments were revised, and re-proposed, several
times during a period of seven years, allowing for significant feedback from the public. In
2013, the final regulations were published.
Figure 1. History of Tangible Property Regulations Since 2006
1
“New Tangible Property Regulations Impact All Business Owners,” Tanya LaCosse, CPA, Nevada
Business, August 8, 2013.
Aug. 21, 2006
Proposed
Amendments
under Section
263(a)
Dec. 27, 2011
Withdrew 2008
proposed regulations
and issued temporary
regulations
May 9, 2012
Public
Hearing on

temporary
regulations
Sep. 19, 2013
Final
regulations
published
Mar. 10, 2008
Withdrew 2006
amendments and proposed
new regulations
Jan. 1, 2012
Temporary
regulations
applied
Nov. 20, 2012
Changed applicable
date of 2011 temporary
regulations to 1/1/14
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A PRACTICAL GUIDE TO COMPLYING WITH
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The final regulations provide a general framework for distinguishing capital expenditures from
supplies, repairs, maintenance, and other deductible business expenses. They also clarify
and expand earlier guidance issued in temporary regulations on acquiring, producing, and
improving tangible property, including:
• De minimis rule change: The safe harbor ceiling has been eliminated
• Routine maintenance safe harbor extension: The 2011 regulations included a routine
maintenance safe harbor for equipment; the final regulations expand earlier guidance and
provide a routine maintenance safe harbor for buildings

• Changes for small businesses: A qualifying small business can elect to not apply the
improvement rules to an eligible property based on certain limits
• Refined criteria for betterments and restorations: The definitions and criteria for
betterments and restorations have been improved for greater clarity
At the same time the final regulations were released, the IRS and the Treasury also released
proposed regulations that revamp and simplify the rules for disposing of depreciable property
under Code Sec. 168 (Modified Accelerated Cost Recovery System – MACRS). While
the proposed regulations contain many of the same property disposition rules as the 2011
temporary regulations, they revise the rules for dispositions and add new rules for partial asset
dispositions.
These regulations provide more guidance and clarity on a number of important issues;
however, they don’t reduce the effort that most companies must expend to start complying
with the new rules.

“Most businesses will have to make one or more tax accounting method changes or elections to comply
with these regulations. In addition, the IRS Large Business and International (LB&I) ‘stand-down’ for
auditing repairs and related dispositions will end starting in 2014, which means that most taxpayers will
no longer have the option to defer compliance with the new rules.”
– KPMG TaxNewsFlash, September 17, 2013

How The Regulations Impact
Your Tax And Accounting Processes
Beyond developing a strategy for when to take elections and filing Form(s) 3115 for change
of accounting method with the IRS, another major component of complying with the final
regulations is to ensure that your financial and tax accounting policies, processes, and
software are revised accordingly.
Despite the fact that the regulations were built on a foundation of existing case law and
previously published guidance, taxpayers will still need to evaluate current capitalization
policies and methods and update them to address the regulatory changes.
For example, taxpayers are required to add an additional evaluation step to determine whether

expenses for book must be capitalized for tax purposes. After importing all expenses and
capitalized assets from the accounts payable or fixed assets subledgers of the financial
accounting system, each asset or expense will need to be evaluated to determine whether it
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A PRACTICAL GUIDE TO COMPLYING WITH
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is an expense or whether it needs to be capitalized for tax purposes. Once capitalized, it will
be depreciated according to the governing tax policies. Figure 2 shows the additional step
required in the data flow for expenses and assets.
Figure 2. New Process for Compliance with Final Tangible Property Regulations
When evaluating your current processes and systems for their ability to support and
streamline compliance with the tangible property regulations, there are three major areas you
should consider:
Fixed Assets Data Flow
To support the requirements for evaluating whether an asset or expense must be capitalized,
the way you handle the data flow between accounting and tax may need to change. To
support the additional evaluation step, you’ll need to include assets and repair expenses in
the data flow to the fixed assets tax subledger. You can then determine the unit of property
impacted and evaluate for capitalization under the tax regulations or for safe harbor status.
Can your current fixed assets system streamline the data flow process for you? BNA Fixed
Assets facilitates the importing of expense and repair data from your financial accounting
system(s) by allowing you to evaluate repair expenses to determine whether they should be
capitalized under the tangible property regulations. Repairs can be accounted for by splitting
the asset into its component parts, the disposal of the repaired portion, and the addition of the
new portion.
Classification and Capitalization of Improvements
Other areas where you should re-evaluate your processes are classification and capitalization.
Characterizing repairs within the payables process enables users to classify repair expenses
that will be capitalized for tax purposes. For example, you could implement specific account

codes that equate to types of repairs.
Import List of Repairs
from A/P or Fixed Assets
Subledgers
Identify the unit of
property to be
evaluated
Evaluate for Betterment,
Restoration, Adaptation,
and Safe Harbor
Capitalize Repair
Process within the fixed
asset software
Process to determine
capitalization for tax purposes
Add Asset
Associate with
orginal asset
Split Asset
May not always
apply if there was
not an existing asset
such as with
adaptation or
betterment
Audit Trail
Dispose Asset
Recognize
Gain/Loss
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A PRACTICAL GUIDE TO COMPLYING WITH
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In addition, your systems need to enable tight association between the (new) improved asset
and the existing asset(s). For instance, if a new roof is added to a building and capitalized as
a separate asset from the building, the building should not be “sold” without also “selling” the
roof.
You’ll need to evaluate whether your current fixed asset system can support these
requirements. BNA Fixed Assets features a robust import capability that allows users to map
the general ledger chart of accounts to depreciation policies, thereby automating the asset
classification and setup policy. BNA Fixed Assets also allows for import of transaction data
from the book fixed assets system or directly from accounts payable, thus supporting the
import of all types of repair data. A detailed audit trail enables you to follow the flow of the
asset throughout the repair life cycle – for partial disposition of existing assets and for addition
of betterment, restoration, or adaptation repairs.
Application of Unit of Property
The tangible property regulations use the concept of unit of property (UoP) as a basis for
determining whether costs should be capitalized or deducted. Because the improvement
standards in the regulations are applied at the building structure or building system level,
it’s critical when adding new property and setting up the asset that you ensure that the
appropriate UoP is used. To do this, you’ll need to create new rules that apply appropriately to
each UoP.
Your fixed assets system should enable you to create and enforce rules for applying UoP. It
should also support splitting assets into appropriate units of property. Not only does BNA
Fixed Assets support the processes you need around UoP, but as existing assets are broken
into their units of property, BNA Fixed Assets maintains a detailed audit trail for the original
and subsequent assets giving you greater accounting control.

“The final repair regulations contain provisions that may be beneficial for some taxpayers but unfavorable
for others.”

– PricewaterhouseCoopers LLP, September 18, 2013

A Roadmap To Implementing New Repair Processing
As discussed in the previous section, your existing processes are impacted by the final
regulations and need to be revised to enable compliance. Accomplishing this with a minimum
of effort and disruption is undoubtedly every company’s goal.
To support that goal, here’s an implementation roadmap (shown in Figure 3) that you can use
to guide you through the effort:
Step One: Clean Existing Fixed Assets Data – To comply with the final regulations, it’s
best to start by reviewing and cleaning up your existing fixed assets data.
a. Remove assets no longer in service (perform a physical inventory of assets if significant
issues in accuracy exist)
b. Review the subledger for correct depreciation policy or treatment of existing assets
c. Split existing assets to reflect the proper UoP and value information where appropriate
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A PRACTICAL GUIDE TO COMPLYING WITH
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Step Two: Build Repair Import Process – Next, develop
a mechanism to identify repairs. It could be as complex as
developing specific account codes, or as simple as including
a check box in your accounts payable system. You then
need to create an import/export process from your accounts
payable system into your fixed assets subledger. Automation
of this process is critical to ensure fast and accurate
processing while reducing manual effort.
Step Three: Implement Audit Trail Tracking – You need
to ensure that facts and circumstances are well documented
as part of the repair record. Include a copy of the accounts
payable invoice, additional notes, and an automatic userID/

date/time stamp for all actions on your asset records.
Step Four: Implement Repair Processing – Now you’re
ready to revise your repair processes.
a. Develop and document processes to dispose of
converted portions of units of property as appropriate
(this may be book-specific)
b. Develop and document processes to capitalize new
repairs and apply fact patterns of the parent asset
c. Develop and document processes to ensure repairs are
disposed or transferred with the parent asset
Evaluating Your Current Fixed Assets Software
As you prepare to make the necessary repair process changes, you should also consider how
well your existing fixed assets system supports the new processes. For instance, how many
steps will be required to process a typical repair with your current system? How many of
those steps are manual?
The point of this exercise is to ensure you have a system that can automate as much of the
repair process as possible and can enforce policies, ensure accuracy, and improve efficiency.
The aim is to minimize manual intervention, maximize control, and provide a strong audit
defense.
How do you know whether your current fixed assets system or one you may be considering
will support your company’s need for compliance with the final tangible property regulations?
One way is to start with the following checklist of features that specifically address efficient
and accurate compliance:
• Automatically pulls data on expensed assets from the accounts payable system
• Easily imports both capitalized and expensed line items from the fixed assets or accounts
payable subledgers
• Enables the set up of assets for all purposes (for both book and tax) based on the invoice
data
• Supports automatic characterization of the assets based on the invoice data
• Allows for easy, what-if analysis and provides dynamic reporting capabilities

1. Clean Existing
FA Data
2. Build Repair
Import Process
3. Implement Audit
Trail Tracking
4. Implement Repair
Processing
Figure 3. Implementation
Roadmap for Repair Process
Changes
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A PRACTICAL GUIDE TO COMPLYING WITH
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• Provides strong accounting controls with limited user intervention
• Supports splitting existing assets into components
• Tracks the relationship between original (aggregate) asset and its components
• Provides a comprehensive audit trail for transactions
Given the broad reaching impact of the regulations, if your software systems don’t support
the new processes and policies needed to comply, the amount of manual work required for
compliance could be significant. Plus manual effort can result in errors that must be corrected
later and which could cost the company additional taxes and penalties. If your current software
doesn’t provide the above functionality, it may be time to look for software that does.
BNA Fixed Assets Helps You Streamline Compliance
BNA Fixed Assets is an easy-to-use fixed assets software that enables tax and accounting
professionals in companies of any size to more efficiently manage the complete fixed asset
lifecycle. Designed to support both tax-only and book-and-tax use, BNA Fixed Assets lets you
handle construction and acquisition through disposal while complying with regulations such
as the final tangible property regulations.

With BNA Fixed Assets, you get the essential capabilities you need to efficiently implement
and manage the repair processes required for compliance with the final regulations, including:
• Automated import and set up of asset and repair data (see Figures 4 and 5)
• Documentation for repair treatment decisions, including an audit trail of all activities
• Automated repair processing steps
• Automatic, comprehensive reconciliation reporting
Figure 4. How BNA Fixed Assets Supports Data Flow for Repair Regulations (for Tax Only Usage)
ERP or Accounting System
:::::::::::::::::::::::::::::::::::::::::::::::::::::::
General Ledger
…
…
Accounts
Receivable
Accounts
Payable
Fixed Assets
Subledger

System of Record
GAAP Calculations
Invoice
Data
Transfers,
Retirements,
Repairs
User Input
Monthly
Export of
Transaction

Data
BNA Fixed Assets G/L Integrator
:::::::::::::::::::::::::::::::::::::::::::::::::
Data Mapping,
Validation,
Reconciliation
BNA Fixed
Assets Web
Import
::::::::::::::::::::::
BNA
Fixed Assets
Web Import
All Tax
Calculations
and Reporting
Tax
Compliance
Systems
::::::::::::::::::::
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A PRACTICAL GUIDE TO COMPLYING WITH
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Figure 5. How BNA Fixed Assets Supports Data Flow for
Repair Regulations (for Book and Tax Usage)
In addition, BNA Fixed Assets enables you to document and enforce your depreciation and
amortization policies for the final regulations:
• Asset Type templates allow you to automate the enforcement and implementation of
corporate policies when data is entered on improvements for units of property

• Auditable tracking mechanisms eliminate potential errors from misclassifying assets,
support expense monitoring associated with tangible property, and automate the process of
tracking partial disposals of repaired capital assets
• Gain/loss reporting provides documentation of allowable retirement gains/losses and
enforces the use of your company’s depreciation, amortization, and expensing policies
With BNA Fixed Assets, you can maximize productivity, comply with GAAP rules and IRS
regulations, and meet all of your financial and tax reporting requirements.

“I have always been impressed with [Bloomberg] BNA’s ability to stay on top of the ever changing tax
climate. I’m certain that as soon as Congress acts there will be updates to [Bloomberg] BNA software.”
–Mark Freedman, CPA

BNA Fixed Assets G/L Integrator
:::::::::::::::::::::::::::::::::::::::::::::::::
BNA Fixed
Assets Web
Import
::::::::::::::::::::::
System of Record
All Calculations
Tax
Compliance
Systems
::::::::::::::::::::
ERP or
Accounting System
:::::::::::::::::::::::::::::
Accounts
Payable
General Ledger

…
…
Invoice
Data
Transfers,
Retirements,
Repairs
Trial
Balance
Data Mapping,
Validation,
Reconciliation
Journal
Entries
Posting File
BNA
Fixed Assets
Web Import
User Input
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A PRACTICAL GUIDE TO COMPLYING WITH
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Conclusion
Compliance with the final tangible property regulations can be complex and will certainly
require significant effort on the part of nearly every taxpayer. While no one looks forward to
implementing major changes to their tax and accounting policies, the right software can ease
the frustration and simplify the tasks involved.
A robust fixed assets system, such as BNA Fixed Assets, can support the final regulations,
and mean the difference between an error-prone, manual set of new steps and a streamlined,

automated repair process. With BNA Fixed Assets, you can handle the most demanding
regulatory tax, accounting, and reporting requirements with ease.
About BNA Fixed Assets
With BNA Fixed Assets from Bloomberg BNA, it’s easy, efficient, and cost-effective for
companies of any size to manage the complete fixed assets lifecycle from purchase to
retirement – saving you time and money while ensuring accuracy. Bloomberg BNA’s
renowned tax expertise is built right into the software – it’s like having a tax expert at your side,
providing the most up-to-date, comprehensive insight into the latest accounting rules and
regulations. Our unique validation engine enforces compliance with tax regulations and GAAP
rules, automatically ensuring accuracy. Even novice users can correctly and easily use the
software without compromising accuracy.
BNA Fixed Assets delivers all the capabilities of a robust fixed assets management system
and grows with you as your business matures. Whether your company has tens, hundreds, or
thousands of fixed assets, there’s a BNA Fixed Assets solution designed to meet your needs
and budget:
• Desktop – Designed for a single user, it’s powerful, but easy-to-use
• Server – For multiple users within the same company
• Web-hosted – Powerful, secure, anytime, anywhere access with no software to install or
maintain
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A PRACTICAL GUIDE TO COMPLYING WITH
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Though intended to provide accurate and authoritative information, this publication is provided with the
understanding that it does not constitute tax, legal, accounting, or other professional advice or service. This
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For more information call 800.424.2938 (select option 3), contact your local
Bloomberg BNA Representative, or visit www.bnasoftware.com.

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