[IMGCAP(1)]The U.S. government is expected to publish final tangible property regulations later this year.
These regulations, currently in temporary form (T.D. 9564), specify when certain expenses can be deducted immediately or capitalized and deducted over time.
Given the difficulties taxpayers have had in implementing the new rules, the IRS has released guidance giving taxpayers additional time and leeway in adopting the rules. The IRS’s May 2, 2013 memo (LB&I-04-0513-003) for the safe harbor method for electric transmission and distribution property expenses is the latest example of this type of guidance. The announcement gives taxpayers additional time to use the safe harbor method set out in Revenue Procedure 2011-43 for electric transmission and distribution property expenses—an option taxpayers should consider.
Electric transmission and distribution property is defined broadly to include “real and personal property that is used to conduct and control electricity at any point between an electric generating station and the location of consumption of the electricity by the customer,” such as wires (conductor), towers, poles, structures and fittings mounted on towers and poles, electrical interrupters (such as circuit breakers, fuses and other switches), transformers, capacitors, instrumentation, security structures, and pads on which equipment is mounted. It also includes street lighting and traffic and similar signal systems.
The revenue procedure then sets out a very specific and narrow definition of what qualifies as a “unit of property” and, for certain qualifying property, a detailed but simplified method for determining whether the unit of property was replaced. The simplified method consists of determining whether 10 percent or more of the united property was replaced. If it is, the expense is to be capitalized. If not, it can be deducted. The revenue procedure also includes an aggregation rule, which requires multiple replacements be counted.
It should be noted that the units of property set out in the revenue procedure are not optional; they apply regardless of whether the taxpayer opts to use the safe harbor method.
The decision as to whether to take advantage of the simplified method and its accompanying rules or face the uncertainty of a position based on the more general rules found in the temporary tangible property regulations can be a difficult one. While taxpayers who incur expenses for this type of property may benefit from the simplified method and the impact it may have on future events (such as abandonments, in the short term), the simplified method may cause select taxpayers to lose out on opportunities to accelerate tax deductions. An example would be if a larger unit of property were identified or multiple replacements were not aggregated, as the new general rules do not adopt the old plan of improvement rules.
While it is helpful that the IRS’s recent guidance gives taxpayers additional time to evaluate the rules, unfortunately the guidance does not make the decision as to whether or not to apply the safe harbor method any easier.
Kreig Mitchell serves on the advisory board of Engineered Tax Services and is a tax attorney focused on federal and state research tax credits and incentives and tax controversies. During his career, Kreig has worked as a tax attorney in private practice, a tax consultant for a research tax credit firm, and an attorney and appeals officer for the IRS. He is also the author of Research Tax Credits, a book published by the American Law Institute-American Bar Association.