United States

California FTB issues guidance on tangible property regulations

TAX ALERT  | 

On Feb. 27, 2015, the California Franchise Tax Board (FTB) issued the March 2015 edition of Tax News to provide guidance regarding the state’s treatment of the federal tangible property regulations, which control when to expense or capitalize certain costs.

During 2013 and 2014, the federal government released final tangible property regulations governing the deduction and capitalization of costs incurred to acquire, maintain or improve tangible property. The regulations generally are effective for tax years beginning on or after Jan. 1, 2014, or, where applicable, to amounts paid or incurred on or after Jan. 1, 2014. To implement these regulations, taxpayers, other than small businesses qualifying under IRS Rev. Proc. 2015-20, are required to file one or more changes of accounting method with the IRS on federal Form(s) 3115.  For more information on the tangible property regulations, please see our comprehensive web resource.

In its news release, the FTB responded to the following questions regarding the state’s approach to the tangible property regulations:

Does California follow the federal tangible property regulations?

The FTB stated in response to this question that California conforms to the Internal Revenue Code (IRC) and regulations, to the extent not in conflict with California law, as enacted on Jan. 1, 2009, and that “[t]he FTB is currently not aware of any specific repair regulations which the FTB would not follow.”

What is the effect of IRS approval of a federal tangible property related change in accounting method?

The FTB stated in response to this question that “if a taxpayer submits a request to change an accounting method for federal tax purposes and the IRS approves the request, the change will also apply for California purposes, as long as California law has conformed to or is substantially similar to the underlying law which is being applied.” However, the FTB recognized that differences may exist between the federal and California depreciable basis, useful life, or applicable method of depreciation that would require adjustments to the federal change for California. In this instance, a taxpayer must attach to its California tax return both a copy of the federal Form 3115 and a pro forma Form 3115 with the numbers adjusted to reflect California-specific differences.

Does California follow IRS Rev. Proc. 2015-20?

The FTB stated in response to this question that the state follows IRS Rev. Proc, 2015-20, allowing qualifying small businesses to apply the tangible property regulations on a prospective basis without the need to file Form 3115.

Although the tangible property regulations were issued after California’s IRC conformity date, the FTB’s answers to the questions above make clear that the state will apply the tangible property regulations under current law. Taxpayers should attach their federal Form 3115 to their California return, as well as a state-specific pro forma Form 3115 showing adjustments to the impact of the accounting method change to reflect federal-to-state differences in depreciable basis, useful life, or applicable method of depreciation. To the extent a small business elects to apply the tangible property regulations on a prospective basis under IRS Rev. Proc. 2015-20, such election would apply for California purposes as well.

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