Deconstructing the Tangible Property Final and Re-proposed Regulations
Understanding how the new guidance may affect your company
On September 13, 2013, the Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations1 (the “Final Regulations”) and re-proposed regulations2 (“the 2013 Proposed Regulations”) (collectively, the “2013 Regulations”) that provide guidance with respect to the treatment of materials and supplies; capitalization of amounts paid to acquire or produce (or facilitate the acquisition or production of) tangible property; the determination of whether an expenditure with respect to tangible property is a deductible repair or must be capitalized; and dispostions of Modified Accelerated Cost Recovery System (“MACRS”) property. Thus, the 2013 Regulations address a broad range of capitalization and deduction issues for expenditures related to tangible property and may likely impact taxpayers in all industries.
The 2013 Regulations are generally effective for taxable years beginning on or after January 1, 2014; however, a number of provisions are effective for amounts paid or incurred in taxable years beginning on or after January 1, 2014. Taxpayers may early adopt any or all of the provisions of the 2013 Regulations. Additionally, taxpayers may make certain elections on amended returns for taxable years beginning on or after January 1, 2012, and ending before September 19, 2013. Changes to comply with or adopt the non-elective provisions in the 2013 Regulations generally will be made through an accounting method change, most of which require the computation of an Internal Revenue Code (“IRC”) § 481(a) adjustment. As of the date of publication, the government has not issued procedures for taxpayers to comply with the 2013 Regulations. This guidance is expected by early November 2013.
The 2013 Regulations retain many of the provisions included in the temporary regulations3 issued in 2011 (“2011 Temporary Regulations”); however, there are a number of new provisions and changes from the 2011 Temporary Regulations as well as changes to pre-January 1, 2014 law.
The major changes include:
- De minimis safe harbor election
- Small taxpayer safe harbor election
- Addition of a casualty loss rule to the restoration rules
- Expansion of the routine maintenance safe harbor to include repairs to buildings (and structural components thereof) and building systems
- Capitalization election
- Revisions to the disposition rules, including partial disposition election
- Changes to the general asset account rules to account for the new disposition provisions
- Expanded and updated examples clarifying the application of the improvement standards
The Final Regulations supersede the 2011 Temporary Regulations. Treasury and the IRS have requested comments on the 2013 Proposed Regulations by November 18, 2013, in advance of the public hearing on the 2013 Proposed Regulations scheduled for December 19, 2013.
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1 T.D. 9636.
2 REG 110732-13.
3 T.D. 9564.