Repair Regs and Treatment of Expenditures
The commonly referred to “repair regs” address the proper treatment of expenditures related to tangible property under IRC Sections 263(a) and 162 and the disposition of such property under IRC Section 168. On Monday, December 17, the Federal Register reflected the amendments to the temporary repair regulations issued December 27, 2011 which indicate an effective date for taxable years beginning on or after January 1, 2014 with an option to early adopt the temporary regulations to taxable years beginning on or after January 1, 2012.
Although the regulations were expected to simplify the application of these rules in light of numerous court cases and IRS rulings, in many instances they require a facts and circumstances analysis and cost segregation study. The good news is that taxpayers have the option to early adopt provisions of the temporary regulations which are beneficial to them for tax years beginning on or after January 1, 2012.; for example, the availability to make late GAA (general asset account) elections for all existing assets placed in service which, at a minimum, provide taxpayers with the option to recognize a loss upon future disposition or simply continue depreciating the retired or replaced asset. Without this election, taxpayers will be required to recognize a loss of the original asset and must capitalize any costs incurred in replacement or restoration of that asset (or other qualified disposition event) which may have otherwise been deductible (i.e., repair or maintenance expense or de minimus). Any accounting method changes required to implement the temporary regulations do not require prior consent of the Commissioner of Internal Revenue (i.e., automatic). The guidance issued in Revenue Procedures 2012-19 and 2012-20 should be followed by taxpayers who early adopt and require a change(s) in method of accounting.
The final regulations (to be issued in 2013) are expected to address the many grievances received from taxpayers and practitioners regarding the application of the rules. As indicated in Notice 2012-73 (IRB 202-51), the provisions expected to be simplified include the application of the de minimis rule (ceiling threshold calculations and the treatment of amounts in excess of the ceiling), the routine maintenance safe harbor (which does not apply to buildings) and the loss disposition rules (which can be administratively simplified).