The Internal Revenue Service has issued transition rules for the repair regulations for tangible property.
The IRS released the long-awaited set of temporary proposed repair regulations in December, and the new rules provide details on how to change accounting methods and other information (see IRS Issues Regulations on Tangible Property Repairs).
Revenue Procedure 2012-19 addresses the repair and maintenance, materials and supplies, and related method changes resulting from the tangible property temporary regulations. Specifically, it provides the procedures by which a taxpayer may obtain the automatic consent of the IRS to change to the methods of accounting for taxable years beginning on or after Jan. 1, 2012.
Revenue Procedure 2012-20 addresses the depreciation, disposition, and related method changes resulting from the tangible property temporary regulations. Specifically, it provides the procedures by which a taxpayer may obtain the automatic consent of the IRS to change to the methods of accounting for taxable years beginning on or after January 1, 2012.
“What they do is fill in the missing pieces on how you implement the changes that may be required under the regulations,” said Eric Lucas, a principal in KPMG’s Washington National Tax practice and a former U.S. Treasury Department official where he was a member of the Repair Regs team. “One rev proc deals with the changes that may be made for depreciation or disposition, and the other revenue procedure deals with pretty much everything else that was in the regs, including the primary issue of whether an expense is a deductible repair or is an improvement. There’s also some detail in there on how make changes for materials and supply, the de minimis rule, and transaction costs is another area. For each of the areas where a method change would be required under the regs, there’s a section that’s added that describes how to make the change. Generally these changes are made under the automatic consent procedures described in Rev. Proc. 2011-14.”
The other way to file a method change is with the non-automatic consent procedures described in Rev, Proc. 97-27. Generally, to file under the automatic consent procedures, the method of accounting has to be described in the appendix to Rev. Proc. 2011-14, Lucas noted.
“If it’s an automatic change, then you file what’s called a Form 3115 that describes the method you’re changing from and the method you’re changing to,” said Lucas. “You file the Form 3115 with a copy of your tax return and you also file a copy with the IRS National Office. But it doesn’t get reviewed by the IRS National Office. They don’t approve it and send you a consent letter, which is what happens under the non-automatic procedure. Under the non-automatic procedure, you file it with the IRS National Office and you don’t have consent to change your method until they send you a consent letter. But under the automatic, you automatically get consent to change without them doing anything. Under the automatic procedure you have a little more time to file. The deadline is you file it by the time you file your tax return. What the transition guidance does is it makes all of these changes eligible for the automatic consent procedure. It’s amending the appendix to Rev. Proc. 2011-14 to now include all of these changes as automatic changes.”
He expects to see further guidance coming out at an industry-specific level for businesses such as the power transmission industry.
A major issue that is addressed in the regulations is whether an expense is currently deductible as a repair or whether it has to be capitalized as an improvement and depreciated over a longer recovery period, he noted.
“That’s the primary issue that the regs addressed,” said Lucas. “One thing you may want to note is that any change in determining your method of repair has to be done with a 481 adjustment. Effectively the regs are retroactive through the 481 adjustment on that issue, which means you look at your opening account balance as of the beginning of 2012, and you figure out if you had applied the regulations to those accounts, what would the difference have been? In other words, would I have treated more costs as repairs or treated more costs as capital?”
The regulations generally are effective for tax years starting in 2012, but because they impose the 481 adjustment, they have the effect of being retroactive, Lucas added.
“That’s confusing to a lot of people,” he said. “They may or may not need to file a method change for a repairs issue. They have to apply the regulations to their own set of facts and then decide whether a change in method is required.”
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