The IRS recently issued a revenue procedure (Rev. Proc. 2015-12) that provides taxpayers with several alternative safe harbor approaches for determining whether expenditures to maintain, replace or improve cable network assets must be capitalized under Section 263(a) and special rules for depreciation.
One of the safe harbors for determining whether expenditures are repairs or improvements is similar to the safe harbor issued for wireline telecommunications networks in Rev. Proc. 2011-27. Alternatively, the guidance provides safe harbor units of property within an individual cable system for purposes of Section 263(a). The new revenue procedure also provides two alternative methods for determining whether costs for installations and customer drops may be deducted as repairs under Section 162 or must be capitalized as improvements under Section 263(a).
Rev. Proc. 2015-12 also provides a safe harbor that the asset used for depreciation purposes encompasses the node and the fiber optic cable to that node, excluding any fiber optic cable previously considered placed in service and/or sold by the taxpayer. The safe harbor further provides that the asset is considered placed in service when the node is ready and available and connected to at least one optic fiber in the fiber optic cable.
The guidance also provides rules for determining whether all cable distribution network assets are primarily used for providing one-way or two-way communication services, which determines whether the assets are classified as 7-year property under Section 168(e)(1) or as 15-year property pursuant to Section 168(e)(3)(E)(ii) for depreciation recovery period purposes. The guidance supersedes Rev. Proc. 2003-63.
Most of the safe harbors are implemented as changes in method of accounting with a Section 481(a) adjustment. Additionally, certain scope limitations are waived for method changes that are made in the first or second taxable year ending after Dec. 31, 2013, which generally means taxpayers may file the automatic method changes even though they are under IRS exam or have recently filed the same type of method change.
However, audit protection is not available if the method being changed is an issue pending (including at appeals or before a federal court). The revenue procedure is effective for taxable years ending after Dec. 31, 2013.
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