Dealing with various iterations of repair and MACRS guidance has been a drawn-out, multi-year process that may finally be drawing to a close.
It all started with sweeping 2011 temporary regulations (TD 9564), followed by a two-year extension (Notice 2012-73) of those regulations; final repair regulations (TD 9636) and proposed MACRS disposition regulations (NPRM REG-110732-13) in September 2013; and recently released revenue procedures (Rev. Procs. 2014-16 and -17) for making required and optional accounting method changes under those regulations. At press time, only some final, mop-up rules on the disposition of MACRS, and their companion revenue procedure, have yet to be unveiled, but no major changes are expected.
This article tries to sort out some of the steps that might be taken during this filing season and later to comply with current repair and MACRS rules, or to take advantage of election opportunities that coincide with return positions or filings.
Caution: Our review does not pretend to be comprehensive, however, leaving that to each practitioner's perusal of the hundreds of pages that combine to make up all the guidance that has been issued over the past three years.
TIMELINE
The "repair" regulations, as they are collectively known, now control how to distinguish a current deductible repair from a capital expense, as well as how to depreciate certain tangible property under the Modified Accelerated Cost Recovery System. In Notice 2012-73, the IRS extended the effective date of the 2011 temporary repair regs to tax years beginning on or after Jan. 1, 2014, effectively allowing taxpayers an additional two years to comply. The final regs, which were issued in September 2013, replace the temporary regs for tax years beginning on or after Jan. 1, 2014. However, taxpayers also have the option of applying either the temporary regs or the final regs to tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. The regulations in effect are also retroactive insofar as accounting method changes will need to be filed in many cases and adjustments made to correct the effects of accounting methods that are now deemed improper under the regulations.
The option to apply the regulations to tax years beginning on or after Jan. 1, 2012, has allowed taxpayers to take immediate advantage of favorable provisions, such as the de minimis expensing rule, the disposition provisions that require recognition of a loss on a retired structural component of a building, and the routine maintenance safe harbor. For a taxpayer's first tax year beginning on or after Jan. 1, 2014, however, all portions of the final regulations will need to be implemented.
- Multiple-year applications. A taxpayer that chooses to apply the temporary regs (or final regs) to tax years beginning on or after Jan. 1, 2012, and before the Jan. 1, 2014, effective date of the final regs does not need to apply all of the temporary or final regs as of the 2012 tax year. As a result, a taxpayer may find itself filing accounting method changes over a three-year period (i.e., 2012, 2013 and 2014) and perhaps even applying provisions in both the temporary and final regs. Taxpayers that do not file any accounting method changes for their 2012 or 2013 tax years based upon those temporary reg provisions that were adopted by the final regs, however, will need to file all of their accounting method changes for the 2014 tax year.
- Due dates. Generally, an automatic accounting method change must be filed for the year of change by the due date of the taxpayer's income tax return (including extensions). Taxpayers on extension through Oct. 15, 2013, for the 2012 tax year may have had just enough time to make a change for that tax year to reflect release of final regulations on Sept. 15, 2013. Missing that date in most cases, however, in effect simply means deferring the benefits of a Section 481 adjustment when a return for 2013 is filed. Amended returns cannot effect a change in account-ing method.
NO METHOD CHANGE NEEDED
The 2013 final repair regulations include several elections that are not accounting method changes. These elections may be made retroactively to the 2012 tax year on an amended return if the amended return is filed on or before 180 days from the due date including extensions of the 2012 return. Certain taxpayers who have already filed 2013 returns without making the elections are also entitled to relief.
As stated going forward, certain benefits under the final regs may be realized without filing a Form 3115, Application for Change in Accounting Method. For example, the election to capitalize rotable temporary or standby emergency parts may be made simply by capitalizing and depreciating on a timely filed original federal return (including extensions) for the tax year that the asset is placed in service. The de minimis safe harbor election is made simply by attaching a statement to a timely filed return each year. And similarly, the election by a small taxpayer to deduct building improvements is made by attaching the appropriate election statement to a timely filed return each year.
REPAIR REG METHOD CHANGES
Rev. Proc. 2014-16, issued in late January, provides procedures for automatic changes to an accounting method required or permitted by the 2013 final repair regulations involving amounts paid to acquire, produce or improve tangible property, effective for applications filed after Jan. 24, 2014. This procedure also applies for applications filed after Jan. 24, 2014, to make a change under the temporary regulations for a tax year beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. Applications filed on or before Jan. 24, 2014, should follow Rev. Proc. 2012-19. Dispositions of tangible property are covered separately in Rev. Proc. 2014-17.
Rev. Proc. 2014-16 also provides automatic consent for taxpayers to change to a reasonable method of accounting under Code Sec. 263A, if certain conditions are met. Unlike Rev. Proc. 2012-19, Rev. Proc. 2014-16 does not require that the taxpayer's uniform capitalization method be in compliance before changing a method pursuant to the repair regulations.
* 481 adjustments. Taxpayers must make a Code Sec. 481(a) adjustment, reflecting the impact of the change in accounting methods on the years prior to the change. For some changes, taxpayers need only make a "modified Sec. 481(a) adjustment" that applies to amounts paid or incurred in years beginning on or after Jan. 1, 2014. A taxpayer has the option of taking into account the amounts paid or incurred in years beginning on or after Jan. 1, 2012.
MACRS-BASED METHOD CHANGES
In late February, the IRS released Rev. Proc. 2014-17, the automatic accounting method change procedures relating to MACRS accounting method changes under final, temporary and proposed regulations that were issued earlier in conjunction with the IRS repair regulations. Of particular note in connection with monitoring deadlines, the guidance allows a late partial disposition election under Proposed Reg. §1.168(i)-8 or a revocation of a general asset account election under Temporary Reg. §1.168(i)-1T or Proposed Reg. §1.168(i)-1 to be treated as a change in method of accounting for a limited period of time.
* Late partial disposition election. The late partial disposition election accounting method change allows a taxpayer to claim a loss on structural components retired in tax years prior to the year of change through a Code Sec. 481(a) adjustment. This change can be made for retirements in any tax year prior to the tax year for which the change is filed.
Taxpayers that previously filed Form 3115 to claim a loss on retired structural components by applying the disposition rules in the temporary regs should conform that treatment to the proposed regulations by making the late disposition election. Taxpayers that did not previously apply the disposition rules in the temporary regulations may also make late partial disposition elections for retirements in earlier tax years and will be entitled to a negative (favorable) adjustment.
Taxpayers that want to change their accounting for leasehold improvements can make the change for multiple assets on a single Form 3115, and can provide a single net Code Sec. 481(a) adjustment, or may provide a single positive adjustment and a single negative adjustment, for all the changes. Smaller taxpayers with average annual gross receipts of $10 million or less may submit a streamlined Form 3115.
The accounting method change for a late partial disposition election must be made for a tax year beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. For a calendar-year taxpayer, the change must be made by filing Form 3115 no later than the extended due date of its 2013 tax return. Going forward, partial disposition elections are generally not accounting method changes and must be made on the return for the tax year in which the disposition/retirement occurred.
This accounting method change also applies to taxpayers who filed a 2012 or 2013 return prior to issuance of the proposed partial disposition election regulations on Sept. 19, 2013, and want to make the partial disposition election for dispositions that occurred in a tax year beginning on or after Jan. 1, 2012, and ending on or before Sept. 19, 2013. The Form 3115, however, only needs to be filed for the first or second tax year following the applicable 2012 or 2013 return year. This gives a calendar-year taxpayer until the extended due date of the 2014 return to make a partial disposition election with respect to 2012 retirements.
* Revocation of general asset account. A second critical accounting method change addressed in Rev. Proc 2014-17 allows a taxpayer to revoke a retroactive general asset account election previously made for assets placed in service in tax years that began before Jan. 1, 2012, and elections made for property placed in service in a tax year that began on or after Jan. 1, 2012, and before Jan. 1, 2014.
The ability to revoke a general asset account is a significant concession by the IRS, since the proposed GAA regulations, which are expected to be finalized effective for tax years beginning on or after Jan. 1, 2014, do not allow a taxpayer to make a partial disposition election for structural components of a building (or components of any other asset) in a GAA. In contrast, under the temporary regs, a taxpayer could not elect to claim a loss on the retirement of a structural component unless a building was placed in a GAA. Many taxpayers placed assets such as buildings in GAAs to take advantage of these disposition rules contained in the temporary regs. They had hoped for a way to unwind that election; they are now given a window of time to do so through the new revenue procedure.
Rev. Proc. 2014-17 provides that the revocation of a GAA election must be made for a tax year beginning on or after Jan. 1, 2012, and before Jan. 1, 2015. Consequently, a calendar-year taxpayer must revoke an election by filing a Form 3115 no later than the extended due date of its 2014 tax return. The late partial disposition election may be made concurrently to claim retirement losses for structural components of a building that was placed in the revoked GAA.
Normally, a positive Code Sec. 481(a) adjustment can be spread over four years. Rev. Proc. 2014-17 requires that some adjustments, such as those from revoking a general asset account election, be included entirely in one year. It should also be noted that, in order to prevent the creation of "phantom assets" by general asset accounts, the IRS will allow a late general asset account election to apply only to assets that the taxpayer owns at the beginning of the year of change.
CONCLUSION
Compliance with, and capitalizing on, the repair and related MACRS guidance applicable to tax years 2012, 2013 and/or 2014 should become the concern of virtually every business in one shape or form. As such, these regulations and associated revenue procedures clearly comprise one of the most significant developments for consideration by tax practitioners to come down the pike in a long time. For many businesses, making the right elections and conforming treatment in compliance with the regulations will start in earnest along with the current 2014 tax filing season.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a part of Wolters Kluwer.
