Editor: Greg A. Fairbanks, J.D., LL.M.
Expenses & Deductions
On Dec. 14, 2012, the IRS issued technical amendments to address the effective date for the temporary regulations (T.D. 9564) that apply to amounts paid to acquire, produce, or improve tangible property. These broadly applicable regulations, commonly referred to as the repair regulations, were issued on Dec. 23, 2011, just days before they became effective for tax years beginning on or after Jan. 1, 2012 (see also Anderson, “Key Aspects of the New Tangible Property Regulations,” 44 The Tax Adviser 24 (January 2013)).
Taxpayers and practitioners have struggled to digest the complexity of the temporary regulations, which in some areas differ significantly from their previously proposed form, and implement the new rules for the 2012 tax year. One area generating confusion was the effective date of the temporary regulations. As originally issued, the temporary regulations were effective for tax years beginning on or after Jan. 1, 2012.
Two additional pieces of guidance issued by the IRS and Treasury, however, gave some doubt as to when taxpayers would be required to apply the temporary regulations. On March 7, 2012, Rev. Procs. 2012-19 and 2012-20 were issued to provide taxpayers with transitional guidance and procedures for making accounting method changes to apply the temporary regulations. The revenue procedures waived the scope limitations for automatic method changes (i.e., waived the limitation on automatic changes for taxpayers that are under IRS examination, have had a change within the past five years, or are in their last year of a trade or business) for a taxpayer’s first or second tax year beginning on or after Dec. 31, 2011. Some taxpayers and practitioners interpreted this scope limitation waiver to mean that taxpayers would have two tax years to apply the temporary regulations.
Shortly after the revenue procedures were issued, the IRS Large Business & International Division issued a directive to IRS field agents about taxpayers that had adopted a method of accounting to convert capitalized costs to repair expense (LB&I-4-0312-004). This directive was necessary because, at the time that the temporary regulations were issued, there was significant controversy between the examining agents and taxpayers about previously filed method changes to deduct repair and maintenance expenditures. The directive instructed agents to suspend current examinations of the issue for 2011 and prior years and not to examine the issue for a taxpayer’s first or second tax year beginning on or after Jan. 1, 2012, until the scope limitation waiver period had passed for the taxpayer. This essentially gave taxpayers two tax years to comply with the temporary regulations before they would be subject to examination.
After the temporary regulations were issued, the IRS and Treasury received many comment letters relating to multiple issues, including the confusion surrounding the effective date. In informal settings, IRS and Treasury officials had commented that the “spirit” of the temporary regulations was to give taxpayers two tax years to comply. However, that was not embodied in the language of the temporary regulations.
The technical amendments to T.D. 9564 clear up the confusion surrounding the effective date. They provide that the temporary regulations apply to tax years beginning on or after Jan. 1, 2014, while permitting taxpayers to choose to apply them to tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. Taxpayers that want to adopt the provisions of the temporary regulations early may do so using the automatic procedures contained in Rev. Procs. 2012-19 and 2012-20.
According to Notice 2012-73, the IRS and Treasury expect to publish final regulations in 2013. The final regulations are expected to be effective for tax years beginning on or after Jan. 1, 2014, though they would permit taxpayers to apply the provisions of the final regulations to tax years beginning on or after Jan. 1, 2012. Additional revenue procedures are expected to be issued to conform with the final regulations.
Taxpayers now have the option to apply the temporary regulations, taking advantage of certain cash flow opportunities they provide, or wait and apply the provisions of the final regulations.
The notice also notes that certain sections of the temporary regulations may be revised in a manner that might affect and, in certain cases, simplify how taxpayers implement the rules in the final regulations. Revisions are contemplated surrounding the de minimis rule in Temp. Regs. Sec. 1.263(a)-2T(g), the disposition rules in Temp. Regs. Secs. 1.168(i)-1T and 1.168(i)-8T, and the safe harbor for routine maintenance in Temp. Regs. Sec. 1.263(a)-3T(g). Any revisions to the temporary regulations would take into consideration all comments received by the IRS and Treasury on these issues, including comments requesting relief for small businesses.
Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.
For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.