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IRS Issues Final Regulations for Acquiring, Producing, or Improving Tangible Assets


9/23/13

Synopsis:
 
The IRS has issued final regulations providing guidance for the tax treatment of tangible property. These final regulations clarify and expand the standards in the current regulations under Code Sections 162(a) and 263(a).
 
Issue:
 
The IRS issued final regulations outlining the tax treatment of amounts paid to acquire, produce, or improve tangible property. In addition, the IRS issued proposed regulations for disposition of tangible property subject to MACRS. These final and proposed regulations replace the temporary regulations that were issued in December 2011.
 
The final regulations reflect several changes that were made to the temporary regulations. They include:

  • A revised and simplified de minimis safe harbor eliminates the ceiling in the de minimis rule and adopts the rule that amounts properly expensed under a taxpayer’s financial accounting policy are deductible, after meeting certain guidelines.
  • A taxpayer may now deduct costs incurred in the routine maintenance of a building. However, the taxpayer must reasonably expect to perform certain qualifying maintenance activities more than once within a 10-year period beginning when the building was first placed in service.
  • The definition of “materials and supplies” is expanded to include property that costs $200 or less (a $100 increase from the temporary regulations) and has an economic useful life of a year or more.
  • The rule permitting a taxpayer’s election to capitalize and depreciate amounts paid for certain materials and supplies is retained, but only for rotable, temporary, or standby emergency spare parts.
  • The criteria for defining “betterments” and “restorations” of tangible property have been changed.
  • There are new definitions for what is considered a major component and a substantial structural part of a building. It also describes the distinction between the two.
  • A qualifying small taxpayer (average gross receipts for the three preceding tax years of less than or equal to $10 million, and an unadjusted building basis of $1 million or less) may elect to deduct the total amount paid during the taxable year for repairs, maintenance and improvements on the building that does not exceed the lesser of $10,000 or 2 percent of the unadjusted building basis.
     

The proposed regulations provide the following:

  • Taxpayers not electing general asset account (GAA) treatment will have similar flexibility as taxpayers that make the GAA election, when it comes to a disposition of a structural building component. The proposed regulations allow a partial disposition election to claim a gain or loss for the portion of an asset that is disposed of in a tax year.
     

These final and proposed regulations are effective for tax years beginning January 1, 2014. However, the provisions in the 2011 temporary regulations, which discuss general asset accounts and disposition property subject to MACRS depreciation, are still in effect, pending further guidance from the IRS.


What Does CohnReznick Think?
The IRS has taken steps to provide clarity for taxpayers when it comes to the decision when to capitalize and when to deduct tangible property costs. Some of these steps achieve the objective while others leave us with a fair amount of subjectivity. Consulting your tax advisor is still a prudent path.


To learn more about CohnReznick’s Tax Specialty Services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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