From the IRS
In December 2011, the IRS issued long-awaited temporary regulations on the treatment of tangible property repairs (see News Notes, “Tangible Property Costs and Repair Expenditures Regs.,” 43 The Tax Adviser 150 (March 2012)). On March 7, it issued two revenue procedures detailing how taxpayers may obtain IRS automatic consent to the accounting method changes required by the rules.
Rev. Proc. 2012-19 addresses repair and maintenance, materials and supplies, and related method changes resulting from the temporary regulations. Rev. Proc. 2012-20 addresses depreciation, disposition, and related method changes resulting from the temporary regulations.
Rev. Proc. 2012-19 separates the accounting method changes into the following categories:
Deducting repair and maintenance costs and changing the definition of units of property for purposes of determining whether amounts have been expended to improve a unit of property under Temp. Regs. Sec. 1.263(a)-3T(a)(3).
Applying the regulatory accounting method for regulated taxpayers.
Deducting nonincidental materials and supplies when used or consumed.
Deducting incidental materials and supplies when paid or incurred.
Deducting nonincidental rotable and temporary spare parts when disposed of.
Deducting rotable and temporary spare parts under the optional method.
Deducting dealer expenses that facilitate the sale of property.
Deducting de minimis amounts.
Deducting certain costs for investigating and pursuing the acquisition of real property.
Deducting amounts paid for routine maintenance on property other than buildings.
Capitalizing costs to facilitate the sale of property by nondealers.
Capitalizing acquisition or production costs.
Capitalizing improvements to tangible property.
Rev. Proc. 2012-20 establishes new automatic accounting method changes for:
- Depreciation of leasehold improvements;
- Changing from a permissible to another permissible method of accounting for depreciation of MACRS property;
- Disposition of a building or structural component;
- Dispositions of tangible depreciable assets (other than a building or its structural components);
- Dispositions of tangible depreciable assets in a general asset account; and
- General asset account elections.
Each of the above accounting method changes has separate detailed rules for implementing it. The changes share the requirement that the Form 3115, Application for Change in Accounting Method, be sent to the Ogden, Utah, office instead of the national office and the requirement to use a single form when making a concurrent automatic change.
The revenue procedures are effective for tax years beginning on or after Jan. 1, 2012.
IRS Suspends Repair/Capitalization Exams Pending Accounting Method Changes
In response to the two revenue procedures, the IRS issued a Large Business & Industry (LB&I) Directive for field examinations on the repair vs. capitalization issue that essentially suspends current examinations to permit taxpayers to file accounting method changes under just-issued revenue procedures (LB&I-4-0312-004).
The IRS notes that the revenue procedures waive the scope limitations of Rev. Proc. 2011-14, Section 4.02, for a request to change a method of accounting, which normally apply to a taxpayer under examination, for taxpayers’ first or second tax year beginning after Dec. 31, 2011.
For examinations of tax years beginning before Jan. 1, 2012, examiners are instructed to discontinue current exam activity and not begin any new activity with regard to the “issues,” which are defined as:
- Whether costs incurred to maintain, replace, or improve tangible property must be capitalized under Sec. 263(a); and
- Any correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components).
The IRS cautions that, if a taxpayer files a Form 3115 with regard to the issues on or after Dec. 23, 2011 (the date the temporary regulations were issued), for a tax year not covered by the temporary regulations, examiners must determine, in consultation with the accounting method change issue group, whether to examine the form.
In addition, for tax years beginning before Jan. 1, 2012, examiners are told to:
- Withdraw the portions of Forms 4564,
- Information Document Request, that relate to the development of these issues.
- Withdraw all Forms 5701, Notice of Proposed Adjustment, related to these issues.
- Issue a new Form 5701 with a Form 886-A, Explanation of Adjustments, with language specified in the directive, the essence of which is that the IRS does not accept or reject the position the taxpayer took in its return on these issues; the taxpayer has a two-year period to adopt the appropriate method of accounting under the newly issued revenue procedures; if the taxpayer does not adopt the new method within that time, the taxpayer may be subject to exam for tax years ending after Dec. 31, 2011, going forward. A copy of this form signed by the taxpayer must be uploaded into the IRS’s information management system (IMS).
- Retain workpapers on these issues in the IMS.
- Complete Form 5426, Examination Information Report.
For tax years beginning after Dec. 31, 2011, and before Jan. 1, 2014, examiners should determine whether the taxpayer filed Form 3115. If the taxpayer did, the examiner should perform a “risk assessment” to determine whether to examine the form. If the taxpayer did not file Form 3115, and the period is still open, the examiner must wait until the period is closed; if the period is closed in which the taxpayer should have filed, the examiner must make a “risk assessment” about the issues.
As part of the risk assessment for any Sec. 481(a) adjustment resulting from the change, the examiner should:
Consider if the adjustment properly accounts for amounts paid that were computed under the taxpayer’s prior method and previously deducted;
Determine if the Sec. 481(a) adjustment resulting from any prior year change was taken into account; and
Consider the accuracy of the Sec. 481(a) adjustment.
For tax years beginning after Dec. 31, 2013, examiners must follow the regulations in effect and follow normal procedures.