If you have incurred costs to renovate, improve or maintain your property in the past or are planning on do so in the near term, a Tangible Property Regulation study (TPR) can uncover significant tax savings, minimize audit risk, and improve cash flow.Â
A Tangible Property Regulation (TPR) study provides the property owner and their tax professionals an array of solutions to properly account for their expenditures related to real estate.Â
More specifically, the results from a well-prepared TPR study can ensure that property owners correctly classify the improvement and renovation costs incurred during ownership, distinguishing between those that must be depreciated overtime versus deductible repair and maintenance expenses. The ability to expense certain items provides immediate first-year benefit to decrease taxable income. Â
Equally important is that the TPR Study can also provide a defensible calculation for the Partial Asset Disposition (PAD) which can be implemented by your CPA when preparing tax returns. The PAD relates to assets that have permanently been removed from the property in the current tax year such as, an entire window system for an office building acquired two years ago will still have 37 years of depreciation remaining that can be written off in year of disposition. Â
Virtually any property could be a good candidate for a TPR Study. Property owners who routinely upgrade or improve their properties throughout their holding period would be well-advised to consider this valuable strategy following a one-time major improvement or on an annual basis as in the case of apartment owners who routinely upgrade rental units following tenant vacancies. Other property types such as hotels, restaurants, auto dealers and franchises that are subject to mandatory “refresh or re imaging can realize significant benefits from TPR Studies.Â
Significant renovations or improvements to its tangible property, a TPR study can help ensure that expenses are properly classified between capital expenditures and deductible repair and maintenance costs.Â
When a company acquires or disposes of tangible assets, a TPR study can help identify any tax-saving opportunities and ensure accurate asset accounting.Â
State bonus depreciation non-conformity:Â Not all states conform to federal bonus depreciation. A TPR study may allow a business to deduct costs immediately for state income tax purposes that would otherwise be capitalized and depreciated.Â
Assets Not Subject to Recapture Tax: Since the TPR Study will expense items and assets eligible for PAD, these items would not be subject to recapture tax upon the sale of the property.Â
Periodic review:Â Depending on their CapEx plans, businesses should consider conducting a TPR study periodically to ensure continued compliance with the regulations and to make necessary adjustments based on changes in business operations or tax laws. Studies may need to be every few years or even every quarter.Â
Prior to an IRS audit: To minimize the risk of issues arising during an IRS audit, it’s a good idea to conduct a TPR study beforehand to ensure compliance with the regulations and identify potential errors or misclassifications.Â
Source Advisors’ Fixed Asset Consulting Group consists of tax and engineering professionals who are well-versed in these complex regulations. A TPR study can be completed together with current year improvements as well as on a retroactive basis. We closely examine a company’s tax depreciation and fixed asset schedules, identify any misclassifications, and recommend necessary adjustments to ensure compliance with the rules.Â
Keep in mind that each business’s situation is unique, so the best time to conduct a TPR study may vary. Consulting with a tax professional or accountant can help determine the most appropriate time for a TPR study based on your specific circumstances.Â
