AICPA Recommends Changes to Complex IRS Capitalization Rules

August 15, 2012

Temporary regulations proposed by the Internal Revenue Service governing the deduction and capitalization of tangible property expenditures would be unnecessarily complex and burdensome for many taxpayers, barring substantive changes, Patricia Thompson, chair of the Tax Executive Committee of the American Institute of CPAs, said in a July 16, 2012 comment letter to the agency.

“The AICPA is concerned that the overall approach in the temporary regulations relies too heavily on a ‘facts and circumstances’ based approach and contains too few bright-line tests and safe harbors to alleviate administrative burden and complexity in the capitalization area,” Thompson wrote.  In fact, she added, additional burdens would be imposed on taxpayers – particularly small businesses – without elimination of “the often controversial aspects of applying general capitalization principles.”

This letter builds on concerns laid out in the AICPA’s initial comment letter on April 17, 2012 and in testimony at a public hearing before the IRS on May 9, 2012, but provides greater specificity in a number of areas.

For instance, the AICPA believes the IRS should provide illustrative examples to guide taxpayers on the interrelationship of some of the temporary regulations, particularly the disposition provisions, general asset account (GAA) elections, and improvement provisions, Thompson wrote. Providing one or two examples would “enable taxpayers to avoid unintentional missed elections in their efforts to comply with the regulations,” she said.

The letter provides new recommendations on the treatment of improvements, as well as materials and supplies, under the temporary regulations. The AICPA also expanded its previous comments on dispositions/GAA elections, Method Change Guidance and acquisition costs. In the latter case, the AICPA believes the de minimis rule in the regulations, which requires an annual financial statement that meets the definition of an Applicable Financial Statement (AFS), discriminates against smaller taxpayers. While it proposes several fixes in this area, the AICPA also suggests an alternative to expand the definition of an AFS to include a financial statement that has been reviewed by a certified public accountant.

Greater detail on all of these topics can be found in a July 17, 2012 article in The Tax Adviser and in commentary that accompanied Thompson’s letter to the IRS, as well as on the AICPA Tax Division resource pageTax Treatment of Expenditures Related to Tangible Property Resources.