And while the deadline for the 2014 tax year has come to a close, the efforts to implement and manage repair regulations best practices should not stop. For many companies, now is the opportune time to streamline the repair regulations function for 2016 and beyond.
Tangible Repair Regulations at a Glance
Ten-years in the making, the new legislation officially released in September 2013 significantly overhauled the way companies were to deduct repairs and maintenance of tangible property. While there were some safe harbor elections making businesses with less than $10 million in revenue exempt, virtually every business was impacted.
With detailed and clear guidance now available, corporations essentially had to review policies and internal processes to ensure compliance with repair regulation changes. In addition, the regulations created the need for new documentation for audit purposes. In other words, achieving compliance with the new mandates was no easy feat.
Year One Lessons Learned
With the majority of corporations on a calendar year, the release of the repair regulations guidance in September 2013 (with an effective date of January 1, 2014) gave companies roughly four months to analyze, and implement the new regulations into their internal processes, procedures and operational systems. Under tight-time constraints, most companies had no choice but to rely on existing, cobbled-together systems mostly comprised of ERP and general ledger software and, of course, spreadsheets. However, these systems had their limitations such as:
- The inability to make changes or fix errors without IT assistance
- The inability to reconcile manually created reports with tax data and financial statements, including the balance sheet
- Inaccurate audit trails due to inability to make and track changes correctly
- Reports that were not easily customizable and didn’t suit the needs of the company
- Difficult in maintaining documentation in light of ongoing regulation changes such as Sarbanes-Oxley and the final tangible property regulation
Manual spreadsheets had their own set of issues; some of the above and some unique to spreadsheets such as vulnerability to human-error and lack of scalability.
For many companies, compliance with the final repair regulations equated to a painful, manual process of analyzing thousands of fixed assets transactions. The regulation also revealed just how inadequate current systems were at addressing the complexities inherent in calculating repairs and maintenance deductions. However, in the interest of time, the goal for the 2014 tax year was to achieve compliance with the regulatory changes in whichever manner possible. For the majority, that typically meant a manual review and update of internal processes, procedures and operational systems or simply conforming to the accounting books method. In fact, a recent poll conducted during a Web seminar of 100 tax and finance executives revealed that over 33 percent of the respondents used manual processes to comply with the 2014 repair regulations changes.
The Opportunity
Based on market research, and feedback from Bloomberg BNA customers and partners, year one of the repair regulations was all about compliance, but year two and beyond are about creating efficiencies through automation technology. Now that the frenzy of the first year of compliance is over, companies are looking to address the misalignment between the systems in place and the new requirements of the repair regulations mandates. This misalignment can be mitigated by taking advantage of the technologies that automate processes to align a company’s accounting systems and chart of accounts with the unit of properties (UOP) that are required under the repair regulations. Another way for companies to realize efficiency gains is to align the systems used to capitalize depreciation with the process used to comply with the tangible regulations. Whichever way you apply automation technology, the overall goals are to reduce the burden of managing repair and maintenance deductions by:
- Identifying the most beneficial tax treatment under current and new regulations, as well as industry-specific guidance
- Uncovering tax savings in the form of immediate deductions for qualified repair and maintenance expenses and accelerated deductions
- Providing confidence that repair and maintenance calculations are accurate
- Shortening closing times
- Providing 24/7 access to repair regulations data with the ability to run customized reports on the fly
- Providing a holistic view of all repairs related to major assets
Beyond the major changes implemented starting in 2014, for some industries those changes were just the tip of the iceberg. Just in the past few months, industry-specific guidance has also been released. For example, the IRS issued guidance for cable companies in September 2015 and most recently, for the retail industry in November 2015. This means that companies in those industries will need a way to add industry-specific domain changes into their processes, making automation even more critical in their quest to remain in compliance.
For financial executives, compliance with the final repair regulations has brought to light the tremendous tax savings potential within the repair and maintenance deductions function. As a result, progressive companies are now seeking out and implementing best-of-breed automation technologies to manage the complete tangible property lifecycle – that includes repairs and maintenance. The result is a transformation of the repairs and maintenance deduction processes as a strategic part of the tangible property lifecycle.
Rashid Nur is executive director of product management at Bloomberg BNA. Rashid has over 20 years of experience in tax, accounting, technology and data management including federal and state tax planning and audit technology, fixed assets for GAAP and tax, and sales and use tax technology.