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Repair Regulations - Effective Application Delayed, But...

By   Andrea Mouw

January 27, 2017

ALERT

The IRS, on November 20, released an advance copy of Notice 2012-73 (Notice).  The Notice indicates the IRS intends to issue final regulations regarding the deduction and capitalization of expenditures related to tangible property in 2013, with an effective date beginning on or after January 1, 2014, rather than January 1, 2012 as provided when the temporary regulations were introduced. But, that does not mean that taxpayers should put plans to implement changes on hold. 

The Notice also indicates that the IRS anticipates that final regulations will revise the following IRS sections, and in some cases, simplify:

  • De Minimis Rule: § 1.263(a)-2T(g);
  • Dispositions: §§ 1.168(i)-1T and 1.168(i)-8T; and
  • Safe Harbor for Routine Maintenance: § 1.263(a)-3T(g).

The Notice permits taxpayers to apply the temporary regulations for taxable years beginning on or after January 1, 2012, and before the effective date of the final regulations.  Taxpayers electing to adopt the temporary regulations prior to taxable years beginning on or after January 1, 2014, may continue to obtain the automatic consent under Rev. Proc. 2012-19 and Rev. Proc. 2012-20.

This means that taxpayers may defer applying the temporary regulations to tax years beginning on or after January 1, 2014, but, taxpayers also have the option to apply the temporary regulations for tax years beginning on or after January 1, 2012, and before the applicability date of the final regulations.

BACKGROUND

On August 21, 2006, the IRS published proposed amendments to the regulations under section 263(a) relating to amounts paid to acquire, produce, or improve tangible property.  On March 10, 2008, the IRS issued new proposed regulations regarding the deduction and capitalization of expenditures related to tangible property.  On December 27, 2011, after considering the written comments and the statements at the public hearing, the IRS published temporary regulations regarding the deduction and capitalization of expenditures related to tangible property.  The temporary regulations generally apply to taxable years beginning on or after January 1, 2012.  The IRS received numerous written comments on the 2011 temporary regulations and held a public hearing on May 9, 2012. The IRS is considering the written comments received as well as the statements from the public hearing as they draft the final regulations.

RECOMMENDATIONS

While the IRS has provided a temporary reprieve from implementing the repair regulations, there may still be some opportunities for those who adopt the regulations early.  Also, those taxpayers that will need to deal with the changes now have the time to put systems and procedures in place in anticipation of adopting the repair regulations in a less time constrained manner.

For example, it still may still be advisable to retroactively elect to treat your building(s) as a general asset account, implement a capitalization policy for financial statement purposes, or to take advantage of other provisions in the temporary regulations.