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IRS Provides Procedures for Automatic Accounting Method Changes Under New Capitalization/Repair Regulations


1/29/14

Synopsis

The IRS recently issued Revenue Procedure 2014-16 which provides revised procedures for automatic accounting method changes under the new capitalization/repair regulations. In general, a taxpayer must receive IRS consent before changing its accounting method. This Revenue Procedure changes how a taxpayer can receive IRS consent for certain automatic changes.
 
Issue

Revenue Procedure 2014-16 changed consent procedures for certain automatic changes contained in the final capitalization/repair regulations. These changes include:

  • Deducting the amounts paid or incurred to acquire or produce non-incidental materials and supplies in the tax year in which they are first used or consumed in the taxpayer's operations
  • Deducting the amounts to acquire or produce incidental materials and supplies in the tax year in which they are paid or incurred
  • Deducting the amounts paid or incurred to acquire or produce non-incidental rotable and temporary spare parts in the tax year in which the taxpayer disposes of the parts
  • Using the option method of accounting for rotable and temporary spare parts
  • Deducting the amounts paid or incurred for repair and maintenance, including a change, if any, in identifying the unit of property, or, in the case of a building, identifying the building structure or building systems
  • Capitalizing the amounts paid or incurred for improvements to tangible property and, if depreciable, depreciating  this property
  • Capitalizing amounts paid or incurred to acquire or produce property and, if depreciable,  depreciating such property
  • Deducting the amounts paid or incurred in the process of investigating or otherwise pursuing the acquisition of real property if the amounts meet certain requirements
  • Change to the optional regulatory accounting method to determine whether the amounts paid or incurred to repair, maintain, or improve tangible property are treated as deductible expenses or capital expenditures
  • Changes by a dealer in property to deduct amounts paid or incurred for commissions and other transaction costs that facilitate the sale of property
  • Changes by a non-dealer in property to capitalize amounts paid or incurred for commissions and other costs that facilitate the sale of property
  • Deducting amounts paid or incurred in the process of investigating or otherwise pursuing the acquisition of real property if the amounts meet certain requirements
  • The optional regulatory accounting method to determine whether amounts paid or incurred to repair, maintain, or improve tangible property are treated as deductible expenses or capital expenditures
     

This Revenue Procedure also added new automatic consent procedures for a producer of tangible property wishing to change to a uniform capitalization (UNICAP) method that uses a reasonable allocation method for self-constructed assets to properly allocate direct and indirect costs among units of property produced during the tax year.
 
These rules are effective as of January 24, 2014. Transition rules are provides for certain Forms 3115 that are postmarked prior to this effective date.
 
What Does CohnReznick Think?
Adherence to the new capitalization/repair regulations is a requirement for all taxpayers that incur costs relating to tangible property. These automatic accounting method changes provide taxpayers with the way to become compliant with the new regulations without having to amend prior year tax returns.

To learn more about CohnReznick’s industries and practices, 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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