The IRS defined (Rev. Proc. 2013-24; 2013-21 IRB 1) units of property and major components that taxpayers may use to determine whether they must capitalize expenditures to maintain, replace or improve steam or electric generation property.
A generation plant is composed of numerous functionally interdependent items of machinery and equipment, and it can be difficult to identify which items constitute discrete units of property, major components or something else. As a result, taxpayers and the IRS often disagree about whether the cost to replace a particular item is a capitalized expenditure or a deductible expense. The IRS will not challenge a taxpayer who uses the units of property and major component definitions of the revenue procedure.
Within the scope of Rev. Proc. 2013-24, a taxpayer may use one or more of the unit-of-property definitions provided in Appendix A and is not required to adopt all of the definitions. But a taxpayer who does use a unit-of-property definition provided in Appendix A must also use the major component definition(s) listed in Appendix A for that unit of property. Additionally, a taxpayer may not rely on a major component definition without using the corresponding unit of property definition, nor may he or she rely on the unit-of-property definitions provided in the revenue procedure for any other purpose of the code or regulations.
A taxpayer who wants to change to the method of accounting described in Rev. Proc. 2013-24 must use the automatic change-in-method-of-accounting provisions in Rev. Proc. 2011-14 or its successor guidance. The scope limitations in Section 4.02 of Rev. Proc. 2011-14 do not apply to an eligible taxpayer who changes to the method of accounting provided in Rev. Proc. 2013-24 for the first, second or third taxable year ending after Dec. 30, 2012. Taxpayers applying the method of accounting provided in Rev. Proc. 2013-24 may extrapolate results to determine the Section 481(a) adjustment amount for certain years by following the relevant procedures provided in Appendix B of Rev. Proc. 2013-24. A taxpayer must take the entire net Section 481(a) adjustment into account (whether positive or negative) in computing taxable income in the year of change.
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