The Treasury Department and the Internal Revenue Service have issued proposed regulations clarifying the treatment of expenditures incurred in selling, acquiring, producing or improving tangible assets.
The IRS said if adopted, the regulations should reduce the amount of controversy between taxpayers and the agency in the area.
For many years, there have been questions about whether taxpayers are required to capitalize certain expenditures as an improvement, or take an immediate deduction for the expenditures as necessary repair and maintenance expenses. The debate was then expanded on how to properly apply the tests used to determine the tax treatment of such expenses.
The proposed regulations provide an framework expanding the standards in the current regulations by drawing on principles developed through case law. Specifically, the proposal provides exclusive factors for determining whether amounts paid to restore property to its former working condition must be capitalized as an improvement.
In the future, the Treasury and IRS plan to address the treatment of costs related to the development and implementation of computer software, as well as the costs required to be capitalized in certain other problematic transactions, including tax-free acquisitive transactions and stock issuance.
Written or electronic comments on the tangible asset guidance must be received by Nov. 20. A public hearing has been scheduled for Dec. 19, 2006.
More information is available at www.irs.gov/newsroom/article/0,,id=161172,00.html.
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