Summary and Background
The proper tax treatment as deductible or capitalizable for expenditures associated with the acquisition, production or improvement of tangible property has long been an area of disagreement between the IRS and taxpayers. A significant step forward was made in December 2011 with the release of the latest version of proposed regulations under section 263(a), and the concurrent release of temporary regulations. These rules affect all taxpayers that acquire, produce or improve tangible property. The guidance also impacts the tax treatment associated with materials and supplies, as well as dispositions of tangible property. The temporary regulations are generally applicable for tax years beginning on or after January 1, 2012.
The IRS requested comments on the proposed regulations, and a public hearing was held on May 9, 2012.
This has been an ongoing project of IRS / Treasury for quite some time now. The first set of proposed regulations were released in August 2006, but were withdrawn after significant public response. A second set of proposed regulations (often referred to as the re-proposed regulations) were released in March 2008. Comments from various taxpayers and others in the tax community, including AICPA, were submitted to the government. The temporary and proposed regulations to be published in the Federal Register on December 27, 2011 are the third attempt at guidance in this area in recent years. The temporary regulations are generally effective for tax years beginning on or after January 1, 2012.
At the end of 2012, Notice 2012-73 was issued on November 20, 2012. The notice indicated that the final regulations will contain numerous changes from the temporary regulations including de minimis rule, dispositions, and safe harbor for routine maintenance. In addition, the effective date of the temporary regulations was extended to January 1, 2014 from January 1, 2012. Taxpayers choosing to apply the temporary regulations during the extended period may continue to obtain the automatic consent of the Commissioner of Internal Revenue to change their method of accounting under Rev. Proc. 2012-19 and 2012-20.
On September 13, 2013, the IRS announced the final tangible property regulations under sections 162 and 263. The final regulations provide for simpler and clearer rules for many taxpayers (i.e., de minimis and safe harbor rules). The final regulations also include a special rule for small taxpayer (gross receipts of $10 millions or less) and safe harbor for routine maintenance. The final regulations generally apply to taxable years beginning on or after January 1, 2014. The procedural guidance is expected soon.
On the same day, the IRS also announced REG-110732-13 (prop. regs. on disposition of depreciable property). The new proposed regulations include changes on determining assets disposed of and definition of qualifying disposition. The new proposed regulations provide a new rule for partial dispositions. Comments on the new proposed regulations are due November 19, 2013 and a public hearing is to follow on December 19, 2013.