The IRS has released Notice 2012-73, which guides taxpayers on how to treat expenses related to the acquisition, renovation, or improvement of tangible property.
IRS Updates Tangible Property Regulations
On November 20, 2012, the IRS updated the temporary regulations guiding taxpayers on how to treat expenses related to the acquisition, renovation, or improvement of tangible property. Notice 2012-73 indicates permanent rules should be expected in 2013, with an effective date of January 1, 2014.
Taxpayers can apply the temporary rules or wait for conclusive guidance on whether an expenditure can be classified as a deductible repair or has to be capitalized as an improvement.
“Taxpayers can make informed decisions even with the temporary rules, and in many cases, implementing these accounting changes earlier rather than waiting for final regulations is encouraged,” says Mark Colvin, a tax senior manager with CliftonLarsonAllen. “Most of the provisions are not expected to change.”
The IRS announcement does identify three areas that will see further review, and may be changed in the final regulation: the de minimus rule, safe harbor for routine maintenance, and dispositions of capitalized assets.
Favorable tax elements exist
Although the comprehensive nature of these regulations requires taxpayers to examine their current accounting methods for compliance, there are also taxpayer favorable elements. For example, there is now potential for taxpayers to dispose of historical assets when those assets are repaired or replaced. Also, some previously capitalized expenses may now be eligible for deduction under the new regulations.
However, capturing the favorable elements may have a limited window of opportunity. The IRS has provided a two-year window to implement the taxpayer favorable components.
How we can help
We can conduct a tangible property review to identify asset costs that are not properly classified. If an expenditure is determined to be a deductible item (supply or repair) under the new regulations, we can apply those deductions in the current year and help your business comply with the new regulations.
Mark Colvin, Tax Senior Manager
mark.colvin@cliftonlarsonallen.com or 309-495-8754