The IRS Large Business and International Division (LB&I) has issued a new directive modifying 2012 guidance that discontinued exam activity on whether certain costs incurred to maintain, replace or improve tangible property must be capitalized under Section 263(a); and related issues involving the disposition of structural components of a building or dispositions of other tangible personal property (“covered repairs issues”).
Background
The new directive replaces a 2012 directive to account for a delay in the effective date of temporary regulations on amounts paid or incurred to acquire or improve tangible property. (See Tax Flash 2012-06 for more information on the original directive). The temporary regulations were amended in December 2012 and now apply to taxable years beginning on or after Jan. 1, 2014, with the option for early adoption in taxable years beginning on or after Jan.1, 2012. Final regulations are expected to be issued during 2013 and will have the same effective date and opportunity for early adoption as the temporary regulations. (For more information on the regulations, see Tax Flash 2012-08).
What is new?
The previous directive allowed covered repairs issues to be examined for the 2013 taxable year because 2013 would have been the end of the original waiver period, which would have given taxpayers two years to comply with the temporary regulations. Under the new directive, covered repairs issues cannot be examined for the 2013 year unless a taxpayer changes its method of accounting for covered repairs issues.
Under the new directive, for taxable years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014, examiners are instructed to determine whether the taxpayer changed its method of accounting, with or without filing a Form 3115. If the taxpayer has made a change during the option period, the examiners are directed to perform a risk assessment regarding the method change. If the taxpayer has not made a change, the issue will not be examined. For examinations for tax years beginning on or after Jan. 1, 2014, examiners will apply the regulations in effect and follow normal exam procedures.
When examining a Section 481(a) adjustment related to whether costs paid or incurred to maintain, replace or improve property must be capitalized, the new directive instructs examiners to:
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consider if the adjustment properly accounts for the amounts computed under a prior method and deducted under Section 162 for the costs paid to acquire, produce or improve tangible property;
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determine if the Section 481(a) adjustment resulting from any prior year change has been taken into account; and
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consider the accuracy of the Section 481(a) adjustment.
The new directive continues to advise examiners to discontinue any current examinations regarding covered repairs issues for taxable years beginning before Jan. 1, 2012.
Wait or early adopt?
The new directive aligns the examination of covered repairs issues with the new effective dates of the temporary and final regulations. All taxpayers must apply the rules in the final regulations no later than their first taxable year beginning on or after Jan. 1, 2014. There may, however, be significant benefits for adopting some provisions of the temporary or final regulations for the 2012 or 2013 years. Taxpayers should determine whether it makes sense to take advantage of the potential benefits of early adoption.
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