Tangible Property Regulations Compliance

Tangible Property Regulations govern the treatment of tangible property for tax purposes. TPRs apply to all taxpayers who own or lease tangible property and provide guidance on how to determine whether costs associated with tangible property are deductible or must be capitalized.

TPRs apply to all taxpayers who own or lease tangible property, including individuals, businesses, and corporations. TPRs apply to any taxpayer who has an obligation to maintain and/or repair tangible property or who makes improvements to existing property.

A repair is a cost incurred to keep property in its existing condition, while an improvement is a cost incurred to add value to the property. Repairs are generally deductible in the year they are incurred, while improvements must be capitalized and depreciated over time.

The de minimis safe harbor rule allows taxpayers to deduct certain amounts paid for tangible property as an expense, rather than capitalizing and depreciating the cost over time. For tax years beginning in 2022 and after, the de minimis safe harbor limit is $2,500 per item or invoice. Taxpayers with an applicable financial statement (AFS) can deduct up to $5,000 per item or invoice.

A disposition is the act of retiring, selling, or otherwise disposing of a piece of tangible property. When a disposition occurs, the taxpayer must recognize any gain or loss associated with the disposition.

A unit of property is a distinct asset, consisting of all the component parts that function together to perform a specific function. For example, a building may be a unit of property, but so too may be the HVAC system or the roof.

A general asset account (GAA) is a depreciation account used to track the cost of assets that have a similar useful life and recovery period. GAAs simplify recordkeeping and reduce the administrative burden associated with tracking and calculating depreciation for individual assets.

The routine maintenance safe harbor allows taxpayers to deduct costs associated with routine maintenance as an expense rather than capitalizing and depreciating the cost over time. To qualify for the safe harbor, the maintenance must be expected to occur more than once during the property's useful life, and the cost of the maintenance must not increase the property's value or extend its useful life.

The improvement threshold is the dollar amount that must be exceeded before costs associated with an improvement must be capitalized and depreciated over time. For tax years beginning in 2022 and after, the improvement threshold is $10,000 or 2% of the property's unadjusted basis, whichever is less.

A partial disposition election is a method of accounting that allows taxpayers to recognize and deduct the loss associated with the disposition of a portion of a unit of property. The election must be made in the tax year the disposition occurs.