On September 13, 2013, the Treasury Department and the IRS released final regulations related to capitalization of specific expenses associated with tangible property, also known as the “repair regulations.”
These new regulations, often referred to as the repair regulations, cover numerous topics, including tangible asset acquisition and disposition, depreciation, de minimis capitalization thresholds, materials, supplies and investigatory costs and other costs that facilitate acquisition of tangible assets. The magnitude of these voluminous regulations will require most, if not all, for-profit businesses to evaluate their current accounting methods for expenses related to repairs, improvements and acquisition of tangible property. In this case, inaction is action; companies that don’t address the regulations lose the ability to file certain automatic accounting method changes.
In general, companies should be aware of the following major changes, effective for taxable years beginning on or after January 1, 2014:
- A change to comply with the regulations is a tax accounting method change. Due to extensive changes from prior IRS guidance, most taxpayers likely will have to change their accounting methods to conform.
- The regulations significantly change the definition of what constitutes a unit of property (UOP), which is central to an analysis of repair expenses and other costs.
- Several changes have been made to the definition of and accounting for materials and supplies, which could affect ability and timing of allowable deductions.
- There are expanded options available to account for rotable and temporary spare parts.
- Under the repair regulations, taxpayers generally must capitalize amounts paid to acquire or produce a unit of real or personal property, unless the materials and supplies rule or the de minimis rule apply.
- Several modifications have been made to the routine maintenance safe harbor rules.
- Changes were made to the asset disposition rules to allow loss recognition on the disposition of structural components of a building.
While not effective until January 1, 2014, taxpayers may adopt all or portions of the temporary or final regulations for tax years beginning on or after January 1, 2012. This presents a unique opportunity to early adopt favorable portions of the regulations prior to the effective date.
BKD has dedicated tax advisors who can help you determine what these changes could mean for your organization and how you can work to remain in compliance.