The American Institute of CPAs (AICPA) has recommended changes to the Internal Revenue Service (IRS) to reduce the complexity and administrative burden facing taxpayers who must comply with the interest capitalization regulations under Internal Revenue Code section 263A(f), Special Rules for Allocation of Interest to Property Produced by the Taxpayer.
Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, explained in the January 4 letter that the final 263A(f) regulations were issued in 1994 and are largely unchanged, although the business operations of taxpayers have undergone significant change since the IRS issued Notice 88-99 addressing the application of the rules to related parties and pass-through entities.
“The final section 263A(f) regulations require taxpayers to track designated property on an individual unit basis for purposes of allocating capitalized interest,” Nellen wrote. “In certain industries where taxpayers may have tens of thousands of units (or even more) that constitute designated property, the administrative burden and complexity of complying with the interest capitalization regulations is substantial.”
The AICPA recommended that the Department of the Treasury and the IRS modify Rev. Proc. 2016-29 (or its successor) to include all accounting method changes necessary for a taxpayer to comply with section 263A(f) and that accounting method changes made by a taxpayer to comply with section 263A(f) are, in general, made with a section 481(a) adjustment and receive audit protection for prior years.
The AICPA also recommended that the IRS:
- Issue proposed regulations providing related party rules;
- Provide an optional safe harbor to follow book or the regulatory interest capitalization method;
- Permit allocation of capitalized interest among units of property using a reasonable method;
- Simplify the rules for capitalizing interest related to inventory;
- Provide an election for taxpayers to opt out of the de minimis safe harbor;
- Allow all taxpayers to elect to use the applicable federal rate plus three percentage points in lieu of the weighted average interest rate; and
- Provide an election to not trace debt in the year traced debt is first incurred.
“The AICPA is confident that implementing our recommendations will promote voluntary compliance and reduce controversy,” Nellen wrote.
Nellen noted that the AICPA previously recommended that the Department of the Treasury 2016-2017 Priority Guidance Plan include a project to clarify and simplify the interest capitalization regulations to make them more administrable.