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Posted 12/28/11
IRS Releases New Reg Package For Capitalization Of Tangible Assets, Withdraws 2008 Rules
The IRS has released proposed and temporary regulations on when taxpayers must capitalize payments to acquire, produce or improve tangible property under Section 263 of the Code. The rules also address accounting for and dispositions of property subject to depreciation. The regulations replace 2008 rules which were withdrawn and are designed to provide objective standards and bright-line rules intended to simplify compliance with the capitalization provisions.
The rules, sometimes referred to as the "repair regulations", address when taxpayers may immediately deduct repair costs incurred to maintain tangible assets versus capitalizing such costs. In general, costs are currently deductible as a repair expense if they do not add materially to the value of property and do not appreciably prolong the property's useful life. Costs also are currently deductible if they are for materials and supplies used during the tax year. On the other hand, expenses must be capitalized if they are for permanent improvements that increase the property's value, restore its value or use, significantly prolong its useful life, or adapt property to a new or different use.
The new regulations make significant changes to the definition of material and supplies, removing the requirement that material and supplies cannot be a unit of property. Aunit of property that costs $100 or less does not need to be capitalized. The rules also make notable changes in the treatment of building improvement costs and in what constitutes a unit of property. The new rules list eight specific building components or systems that will be considered separate and must be capitalized. They are: HVAC systems, plumbing, electrical systems, escalators, elevators, fire protection and alarms, security systems, gas distribution components, and any other system specifically identified in IRS guidance.
The temporary regulations generally are effective for expenditures made on or after January 1, 2012, and therefore these regulations do not affect taxpayers' 2011 tax returns. The IRS and Treasury Department anticipate publishing additional guidance that will advise taxpayers on how to obtain automatic consent to change to a method of accounting provided in the temporary regulations for taxable years beginning in 2012. Automatic consent requests may be filed beginning with taxpayers' 2012 tax returns. Taxpayers may not request a change to a method described in the temporary regulations on their 2011 tax returns.
Written comments are due by March 26, 2012, and a public hearing on the regulations is scheduled for April 4, 2012.
Click here for the full text of the temporary regulations.
Click here for the full text of the Notice of Proposed Rulemaking.