Key Aspects of the New Tangible Property Regulations

EXECUTIVE SUMMARY

Temporary regulations on expenditures to acquire, improve, and maintain tangible property significantly modify previous guidance and 2008 proposed regulations, which the IRS withdrew. The temporary regulations cover the treatment of repairs and routine maintenance, materials and supplies, de minimis thresholds, capital improvements, and disposal of property subject to depreciation. They provide rules for determining improvements as betterments, restorations, and adaptations of property to a new and different use. A “unit of property” includes all its components that are functionally interdependent, with some exceptions. A safe harbor allows deduction of amounts paid to repair and maintain property, based on the taxpayer’s expectation to perform the activities more than once during the property’s class life. A de minimis threshold exception from capitalization for expenditures to acquire or produce property is the greater of 0.1% of gross receipts for the tax year or 2% of total depreciation and amortization on the taxpayer’s applicable financial statement for the tax year.

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On Dec. 23, 2011, the IRS released temporary regulations for Secs. 162(a), 168, and 263(a) regarding expenditures to acquire, improve, and maintain tangible property.1 These temporary regulations, which were simultaneously issued in proposed form, are the third set of regulations issued on this topic in the past six years. Treasury issued proposed regulations in 2006, but comments indicated that the regulations were too burdensome and complex. In 2008, Treasury withdrew the 2006 proposed regulations and issued new proposed regulations.

The 2011 regulations incorporate feedback from commentators while retaining many of the provisions from the 2008 proposed regulations, which the IRS also withdrew. The temporary regulations when issued were generally effective for tax years beginning on or after Jan. 1, 2012. However, in response to numerous comments from taxpayers and practitioners, the IRS in November 2012 delayed their effective date to tax years beginning on or after Jan. 1, 2014.2 Instead, taxpayers are permitted (but not required) to apply the temporary regulations for tax years beginning on or after Jan. 1, 2012, and before the applicability date of the final regulations. The IRS also announced that it intends to issue final regulations sometime in 2013, that the final regulations will also apply to tax years beginning on or after Jan. 1, 2014, and that taxpayers may choose to apply them to tax years beginning on or after Jan. 1, 2012.3

The temporary regulations make several significant changes affecting taxpayers that own and use tangible property. These changes include revised de minimis rules and safe harbors, new unit-of-property-rules, and new elections for property dispositions. The IRS notified taxpayers in Notice 2012-73 that it intends to simplify certain of the rules in the temporary regulations when they are finalized. These include the de minimis rule, the safe-harbor rule for routine maintenance, and the rules for dispositions, all of which are discussed below. However, the IRS did not specify how it would simplify these rules.

The regulations address:

1. Repairs and routine maintenance;
2. Material and supplies;
3. De minimis rules for acquisitions of tangible property;
4. Capital improvements to existing tangible property;
5. Disposals of modified accelerated cost recovery system (MACRS) property;
6. Transaction costs to acquire real property;
7. Costs to investigate and pursue the purchase of real property;
8. Acquisition of and expenditures for “network assets” and leasehold improvements;
9. Expenditures for property on which a casualty loss has been deducted;
10. Environmental cleanup costs;
11. Costs subject to capitalization under Sec. 263A;
12. Regulatory accounting methods;
13. Rotable and temporary spare parts; and
14. Costs to facilitate the sale of property by nondealers.

This article describes the first five items and discusses tax planning ideas for businesses and tax advisers to use in responding to the temporary regulations.

Unit of Property

The temporary regulations use the concept of a “unit of property” as a basis for determining whether costs are capitalized or deducted. For real and personal property other than buildings, the new regulations retain the general rule that a single unit of property includes all components that are functionally interdependent. Components are functionally interdependent if “the placing in service of one component by the taxpayer is dependent on the placing in service of the other component.”4 The functional interdependence rules are based on decisions in FedEx Corp.5 and Ingram Industries.6

Example 1: A computer includes multiple components, including a motherboard, random access memory, central processing unit, and hard drive, that work together or are functionally interdependent. Consequently, a computer is a single unit of property.

Example 2: A computer and printer are not functionally interdependent units of property since one is not required to place the other in service.7

There are two exceptions to the functional interdependence rule:

1. Plant property (other than buildings) used in industrial practices such as manufacturing, electrical generation, distribution, and warehousing that is separated into components or a group of components that perform a discrete and major function or operation within the functionally interdependent machinery or equipment.8
2. A component that, at the time the taxpayer places it in service, is properly depreciated using a different MACRS class or method than that of the unit of property of which the component is a part.9

Example 3: A taxpayer in the transportation business purchases a truck trailer. The trailer and its tires are functionally interdependent, but the taxpayer records the tires and trailer separately in its books and assigns them different depreciable lives. The trailer and the tires are considered separate units of property.10 If the tires and trailer were depreciated using different methods but had the same useful life, they would still be separate units of property.

The 2011 regulations remove the “book life consistency rule” of the 2008 proposed regulations that would have required a taxpayer to treat property as separate units if the taxpayer initially assigned a different life to the component for financial statement or regulatory purposes than the economic useful life of the property of which the component was a part.11

Repairs and Routine Maintenance

Amounts paid to repair and maintain property are deductible in the year incurred if not required to be capitalized under Temp. Regs. Sec. 1.263(a)-3T or any other provision of the Code or regulations.12 Routine maintenance is provided a safe harbor in the regulations, where it is defined as the recurring activities that a taxpayer expects to perform as a result of the taxpayer’s use of the property to keep it in its ordinarily efficient operating condition.13 Common examples of routine maintenance and exceptions are described in Exhibit 1. The routine maintenance safe harbor in Temp. Regs. 1.263(a)-3T(g) is one area the IRS says it intends to simplify when the final regulations are issued.

The temporary regulations retain the same routine maintenance safe harbor that was in the 2008 proposed regulations. Under this rule, activities are routine if, at the time property is placed in service, the taxpayer expects to perform the activities more than once during the class life of the unit of property.14 Taxpayers must use the alternative depreciation system class life of the asset under Secs. 168(g)(2) and (3) when making this assessment.15

Example 4: A commercial airline removes its aircraft engines every four years so they can be disassembled, inspected, cleaned, repaired, and tested (an engine shop visit). If the unit of property is the aircraft and has a class life of 12 years, the engine shop visit costs are routine maintenance, since the visits are expected to be performed more than once during the aircraft’s life.16

There are exceptions to the safe-harbor provisions. The safe harbor does not apply to buildings or their structural components.17 If the adjusted basis of a component of personal property has been included in the calculation of a loss on the sale, exchange, or casualty of the unit of property, the cost of its replacement cannot be considered routine maintenance.18 (See also other exceptions in Exhibit 1.)

Example 5: The taxpayer is a trucking firm that treats tires as a unit of property. At the end of their useful life, the used tires are sold to an auto salvage yard. The taxpayer cannot treat the replacement of a tire as routine maintenance.

Expenditures for cleaning, inspecting, and performing minor repairs to a newly acquired used item of property must be capitalized to the extent this work is for a portion or all of a scheduled maintenance period occurring during a prior owner’s use of the property.19

If the property’s condition has deteriorated to an extent that it is no longer able to function, the costs incurred to return the property to its ordinarily efficient operating condition are not repairs.20 If the safe-harbor test is not met, the costs do not necessarily have to be capitalized but should be evaluated to determine whether they result in a betterment, restoration, or a new and different use for the property.

A taxpayer that wants to change its accounting method for repairs and maintenance to comply with the regulations must file a request for an automatic change in accounting method using Form 3115, Application for Change in Accounting Method. This change necessitates the calculation of a Sec. 481(a) adjustment.21

Materials and Supplies

The regulations distinguish between the treatment of incidental and nonincidental materials and supplies. Incidental materials and supplies are those for which no record of consumption is kept or no physical inventory is taken. The cost of materials and supplies is deductible when paid or incurred. Nonincidental materials and supplies are deductible in the tax year in which the items are used in the taxpayer’s operations.22 The temporary regulations define materials and supplies as tangible property that is used or consumed in the taxpayer’s operations that is not inventory and is:

1. A component acquired to maintain, repair, or improve a unit of tangible property and that is not acquired as part of any single unit of tangible property;
2. Fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less;
3. A unit of property with an economic useful life of 12 months or less, beginning when used in the taxpayer’s operations;
4. A unit of property that has an acquisition or production cost of $100 or less; or
5. Materials or supplies identified in IRS guidance, including pronouncements issued prior to the temporary regulations.23

The 2008 regulations did not allow a single unit of property to be considered materials and supplies, but this restriction has been removed in the temporary regulations.24

The temporary regulations establish three possible treatments for materials and supplies:

1. Deduct in the year acquired, as allowed in the de minimis provision discussed in the next section;
2. Deduct in the year used; or
3. Capitalize and depreciate (also described in the next section).

A taxpayer that wants to change accounting methods to deduct incidental and nonincidental materials and supplies expenses should request an automatic change in accounting method and report a Sec. 481(a) adjustment.25

De Minimis Rules

The temporary regulations retain the de minimis rules from the 2008 proposed regulations allowing a current deduction for expenditures to acquire or produce a unit of property. Note that the IRS intends to simplify the de minimis rules in Temp. Regs. Sec. 1.263(a)-2T(g) when the final regulations are issued.

The 2011 regulations expand the de minimis rules to include tangible property acquired to repair or improve existing tangible property.26 The de minimis rules do not apply to acquisitions of inventory or land.27 To qualify for de minimis treatment, a taxpayer must:

1. Have in place at the beginning of the tax year written accounting procedures for expensing property costing less than a specified amount.
2. Have an applicable financial statement. An applicable financial statement includes statements required to be filed with the SEC, an audited financial statement, or a financial statement required to be filed with a federal or state government or agency.
3. Expense the property described in 1 above on the applicable financial statement.28

If the above requirements are met, taxpayers are allowed a current deduction for property, materials, and supplies in an amount less than or equal to the greater of:

• 0.1% of the taxpayer’s gross receipts for the tax year, as determined for tax purposes, or
• 2% of the taxpayer’s total depreciation and amortization expense for the tax year in its applicable financial statement.29

Example 6: A taxpayer has gross receipts of $50 million and depreciation and amortization expense on its financial statements of $600,000. The taxpayer is allowed a de minimis deduction of $50,000 (0.1% of $50 million equals $50,000, which is greater than $12,000 (2% of $600,000)).

The 2008 regulations included a requirement that the total amount not capitalized
under the de minimis provision could not distort a taxpayer’s income for the year; the 2011 regulations remove this requirement.30

Example 7: A taxpayer purchases 10 printers costing $200 each, for a total cost of $2,000. Each printer qualifies as a separate unit of property. The taxpayer has an applicable financial statement as well as a written policy to expense amounts paid for property costing less than $500. The taxpayer treats the cost of the printers as an expense on its applicable financial statement. Assuming that the total noncapitalized expenditures are below the de minimis ceiling, the taxpayer can deduct the $2,000 cost of the printers.31

Careful planning will be necessary to ensure that taxpayers qualify for the de minimis provision. If the amount of noncapitalized materials, supplies, and property exceeds the de minimis limitations, taxpayers are unable to elect de minimis treatment for any of these assets.

Example 8: The taxpayer’s de minimis limitation is $50,000. The taxpayer purchases materials, supplies, and eligible tangible property costing $70,000 during the tax year. No election is made to capitalize the materials, supplies, and property. Since the amount of eligible expenditures exceeds $50,000 and no capitalization election is made, the taxpayer will not be allowed to deduct any amounts under the de minimis provisions. If eligible, the taxpayer can elect Sec. 179 expensing.

Example 9: The taxpayer has a de minimis limitation of $50,000. The taxpayer purchases materials, supplies, and eligible tangible property costing $70,000 during the tax year. The taxpayer elects to capitalize $20,000 of the materials, supplies, and eligible tangible property. The taxpayer will be able to deduct $50,000 under the de minimis provision because the amounts in excess of the ceiling are capitalized.32

Taxpayers must elect to apply the de minimis rule to materials and supplies.33 This election is made by timely filing of a tax return that includes a deduction for materials and supplies in the year paid.34 Taxpayers that decide to use the de minimis rules must file Form 3115 requesting an automatic change in accounting method.35 If a taxpayer chooses to capitalize materials and supplies, the election is made by capitalizing and depreciating the materials and supplies on a timely filed tax return.36

Expenditures for Existing Property

Sec. 263(a)(1) requires that all expenditures incurred for permanent improvements or betterments made to increase the value of property must be capitalized. According to both the 2008 and 2011 regulations, when an expenditure is made that changes the condition of existing property, taxpayers must first identify the appropriate unit of property and then determine the expenditure’s effect on that unit of property. If the expenditure results in a betterment, restoration, or adaptation of property to a new and different use, then the costs must be capitalized.37

Although a building continues to be treated as a single unit of property under the new regulations, taxpayers will no longer be able to classify an expenditure as a capital improvement or deductible repair based on its impact on the condition of the building as a whole.38 The new regulations apply the improvement standards separately to the building structure or to any of the following building systems: (1) heating, ventilation, and air conditioning (HVAC) systems; (2) plumbing systems; (3) electrical systems; (4) all escalators; (5) all elevators; (6) fire protection and alarm systems; (7) security systems; (8) gas distribution systems; and (9) any other systems identified in published guidance.39

Example 10: A corporate taxpayer incurs expenditures on its building’s electrical system. The appropriate comparison for determining whether the expenditure is a repair or improvement is the electrical system before and after the expenditure.

Types of Capital Improvements

According to the Supreme Court, capitalization is mandated when an expenditure creates a benefit that will be realized beyond the year in which it is incurred.40 The regulations identify three types of capital expenditures: betterments, restorations, and adaptations of property to a new and different use.41 Treasury developed these categories based on a thorough study of case law on capital improvements and repairs.42

Betterments

Sec. 263(a) states that a permanent improvement or betterment made to increase the value of property must be capitalized. As with the 2008 proposed regulations, the temporary regulations define betterments as:

1. The amelioration of a material defect that existed prior to the acquisition or arose during the production of the unit of property, whether or not the taxpayer was aware of the defect at the time of acquisition or production;
2. A material addition to the unit of property, such as a physical enlargement, expansion, or extension; or
3. A material increase in capacity, productivity, efficiency, strength, quality, or output of the unit of property.43

In writing the 2011 regulations, the IRS rejected proposals that the taxpayer’s knowledge of a defect be considered in determining whether capitalization is required.44

In general, in evaluating whether a betterment has occurred, taxpayers must compare the condition of the property immediately before and after the circumstances necessitating the expenditure.45 For expenditures to correct normal wear and tear, the comparison should be between the property’s condition immediately after the last time wear and tear was corrected to the condition of the property after the expenditure.

If there have been no previous expenditures to correct wear and tear, the comparison is between the condition of the property when placed in service and its condition after the correction for wear and tear.46 If a particular event has caused the taxpayer to incur expenditures to correct
the property’s condition, the condition of the property immediately prior to the event is compared to its condition after the correction.47

Mere replacements of a part are not betterments if the property’s function or condition is not materially improved or increased by the replacement. If the replacement results in increased capacity, productivity, efficiency, strength, or quality, the replacement is a betterment. Taxpayers often face the situation where the same part is no longer available for replacement. In this case, replacement with an improved but comparable part does not result in a betterment.48

Example 11: The taxpayer replaces wood shingles on a roof because of storm damage. The appropriate comparison is the building structure before and after the replacement. The roof was functioning properly before the storm. If the shingles are replaced with similar wood shingles, the replacement is not considered a betterment. If the same type of wood shingles are no longer available and the shingles are replaced with asphalt shingles of the same quality, the replacement still is not a betterment. However, if the new shingles are of greater quality (e.g., they have a longer warranty period) the replacement is a betterment, and the costs must be capitalized.49

In response to comments, the new regulations specifically address expenditures to refresh or remodel retail stores. The facts and circumstances of each situation must be examined to determine whether the expenditures constitute a betterment. Cosmetic changes and replacements with the same or comparable parts are not betterments; however, significant changes to the building structure (e.g., removal of walls, better insulation, improved automatic doors) constitute improvements that must be capitalized.50

The temporary regulations state that the IRS will not invoke the plan-of-rehabilitation doctrine, a judicially developed doctrine providing that a taxpayer must capitalize otherwise deductible repair and maintenance costs if they are incurred as a part of a general plan of rehabilitation, modernization, or improvements to a property. Instead, the IRS will apply Sec. 263A, which requires capitalization of costs that are incurred due to an improvement.51

Restorations

The proposed regulations provide a series of bright-line rules to determine whether a restoration of property has occurred. These rules are listed in Exhibit 2.

The last type of restoration in Exhibit 2 is replacement of a major component or substantial structural part of a unit of property. The temporary regulations adopt a facts-and-circumstances approach in determining whether a component is major or a structural part is substantial and costs must therefore be capitalized, rather than the 2008 proposed regulations’ standard of 50% or more of the replacement cost or physical structure of the unit of property.52

New or Different Use

Amounts paid to adapt a unit of property to a new or different use must be capitalized. A new or different use is a use that is not consistent with the taxpayer’s intended ordinary use of the unit of property at the time the taxpayer originally placed the property in service.53 For example, in Dominion Resources,54 the taxpayer removed asbestos and other hazardous substances from a power plant building. The taxpayer could not sell, donate, or develop the property without first removing the contaminants. The court ruled that the remediation converted the property to a new and different use, so the costs incurred were capital expenditures.

Taxpayers whose current treatment of expenditures for tangible property does not adhere to the regulations will need to request an automatic change in accounting method and make a Sec. 481(a) adjustment.55

Dispositions of Building Structural Components

The temporary regulations revise the property disposition and depreciation rules. This is the third area of the temporary regulations that the IRS says it intends to simplify when the final regulations are issued.

With the new rules for determining improvements to a building, taxpayers are more likely to capitalize expenditures that previously would have been deducted as repairs. Generally, a taxpayer replaces a building component, such as a roof, and continues to depreciate the old roof even after it is replaced. In addition, the replacement roof is also depreciated over the life of the building. This situation results in the taxpayer’s depreciating the old and new roofs simultaneously.56 The taxpayer is unable to recover the cost of the old roof until the disposition of the building.57 The temporary regulations correct this problem by permitting taxpayers to recognize the disposal of a structural component of a building. Taxpayers are now permitted to remove the cost of the old component from the depreciable basis of the building and recognize a loss on the abandonment of the old component.58 However, the rules to achieve this result are somewhat complicated.

To be entitled to recognize losses on structural components of MACRS property, the taxpayer must depreciate the property using general asset accounts.59 Taxpayers may assign multiple assets to a multiple asset account.60 All assets in a single multiple asset account must have the same depreciation method, recovery period, and convention and be placed in service during the same year.61 Assets eligible for additional first-year depreciation can be grouped only with assets eligible for the same percentage of additional first-year depreciation.62 A single building can be assigned to a general asset class, and the building components are separate assets within the class.

The temporary regulations revise the definition of a qualifying disposition to include the retirement of a structural component of a building.63 The loss on the abandonment of an asset equals the asset’s adjusted depreciable basis at the time of disposition.64 Taxpayers can use any reasonable, consistent method to determine the basis of the structural component that is replaced.65

Example 12: The taxpayer purchases a multistory building for $20 million on July 1, 2009. The cost of the building’s structural components is not separately stated at the time of acquisition. On June 30, 2012, the taxpayer replaces an elevator. The taxpayer allocates $150,000 of the building’s original purchase price to the old elevator using a reasonable method. Accumulated depreciation allocable to the elevator at the time of replacement is $11,380. Depreciation is calculated using the depreciation method, convention, and recovery period applicable to the larger asset of which the asset disposed of is a component (including allocable additional first-year depreciation claimed, if any).66 The taxpayer recognizes a loss on the abandonment of the old elevator of $138,620 ($150,000 − $11,380). The basis of the building is reduced by $150,000, the cost allocated to the old elevator. Accumulated depreciation on the building is also reduced by the depreciation claimed on the old elevator.67 The character of the loss is determined by the applicable provisions of the Internal Revenue Code.68

General Asset Accounts

Taxpayers must elect to recognize a gain or loss on a qualifying disposition of an asset from a general asset account.69 Otherwise, no gain or loss is recognized until the disposition of all of the assets, or the last asset, in the general asset account.70

The election to use general asset accounts is made by checking the box on line 18 of Form 4562, Depreciation and Amortization, in the year the assets are placed in service. The temporary regulations allow greater flexibility in terminating general asset account treatment than under prior Regs. Sec. 1.168(i)-1; however, the election is generally irrevocable and is binding in subsequent years.71 Taxpayers electing general asset accounts should maintain records that establish the unadjusted depreciable bases and depreciation reserve of the general asset account and that reflect the amount realized during the tax year upon dispositions from the account.

Planning Ideas

Taxpayers will want to consider several issues arising from the temporary regulations:

1. If taxpayers want to use the de minimis provisions for tangible property, they should adopt written accounting policies for expensing assets below a specified dollar amount as soon as possible. Taxpayers may want to consider having their financial statements audited to be considered an applicable financial statement for the de minimis requirements. Although this policy is required to be in place at the beginning of a tax year, hopefully the IRS will be lenient, given the short time between the issuance of the regulations, Dec. 23, 2011, and the tax year beginning Jan. 1, 2012, for calendar-year taxpayers.
2. Taxpayers should develop a strategy for choosing the assets elected for the de minimis rules. The cost of property expensed under the de minimis election does not reduce the Sec. 179 amount available. Taxpayers should take care to capitalize materials, supplies, and property in excess of the de minimis amount.
3. Taxpayers should consider using general asset accounts for their real property. This election will not change their depreciation calculations and provides flexibility when disposals occur.
4. Most changes to comply with the regulations are considered a change in accounting method under Sec. 446(e).72 Automatic changes in accounting method must be filed no later than the date on which the return is filed (including extensions), but not earlier than the first day of the year in which the change is applicable. Many taxpayers will need to file multiple Forms 3115. The IRS has directed its personnel to stop examinations on whether costs should be capitalized under Sec. 263(a) during 2012 and 2013.73 However, examiners will ascertain whether taxpayers have requested a change in accounting method to comply with the temporary regulations.
5. Taxpayers may want to obtain cost-segregation studies to determine the amount allocable to building components. However, a recent Tax Court case, Peco Foods, disallowed cost segregation because an allocation agreement at the time the business was purchased did not specify the breakdown.74
6. Taxpayers should also consider the financial accounting impact of the regulations. While many companies use de minimis expensing policies for book purposes, the regulations’ strict limitations will likely result in temporary differences. Many businesses also use multiple asset accounts for their books, but the composition of these accounts will frequently differ from those required by the regulations. The FIN 48 provision75 may need to be reevaluated.
7. Taxpayers should determine whether the new regulations affect their disclosures on Schedule UTP, Uncertain Tax Position Statement, if applicable.

Taxpayers should maintain documentation of expenditures to existing property, maintenance manuals, warranties, and any information regarding industry practice to support their decisions. Maintenance logs can also demonstrate eligibility for the routine-maintenance safe harbor. When purchasing used property, taxpayers may want to obtain third-party evaluations of the property’s condition to show that post-acquisition expenditures are not incurred to correct an existing defect.

This article describes only a few of the provisions in the temporary regulations. Tax advisers should consult the regulations to better understand how the rules apply to their clients. The regulations contain several elections that may result in tax savings for their clients. Taxpayers who seek to take advantage of the regulations will need to take action quickly.

 

Footnotes

¹ T.D. 9564.

² Notice 2012-73, 2012-51 I.R.B. ___.

³ Id.

⁴ Temp. Regs. Sec. 1.263(a)-3T(e)(3)(i).

⁵ FedEx Corp., 412 F.3d 617 (6th Cir. 2005), aff’g 291 F. Supp. 2d 699 (W.D. Tenn. 2003).

⁶ Ingram Industries, T.C. Memo. 2000-323.

⁷ Temp. Regs. Sec. 1.263(a)-3T(e)(6), Example (9).

⁸ Temp. Regs. Sec. 1.263(a)-3T(e)(3)(ii)(B).

⁹ Temp. Regs. Sec. 1.263(a)-3T(e)(5)(i).

¹⁰ Temp. Regs. Sec. 1.263(a)-3T(e)(6), Example (16).

¹¹ Preamble to T.D. 9564, Explanation of Provisions, VI.B.6.

¹² Temp. Regs. Sec. 1.162-4T(a).

¹³ Temp. Regs. Sec. 1.263(a)-3T(g)(1).

¹⁴ Id.

¹⁵ Temp. Regs. Sec. 1.263(a)-3T(g)(4).

¹⁶ Temp. Regs. Sec. 1.263(a)-3T(g)(5), Example (1).

¹⁷ Temp. Regs. Sec. 1.263(a)-3T(g)(1).

¹⁸ Temp. Regs. Sec. 1.263(a)-3T(g)(3)(ii).

¹⁹ Temp. Regs. Sec. 1.263(a)-3T(g)(5), Example (4).

²⁰ Temp. Regs. Sec. 1.263(a)-3T(g)(3)(iv).

²¹ Rev. Proc. 2012-19, 2012-14 I.R.B. 689.

²² Temp. Regs. Sec. 1.162-3T(a).

²³ Temp. Regs. Sec. 1.162-3T(c)(1).

²⁴ Preamble to T.D. 9564, Explanation of Provisions, II.A.

²⁵ Rev. Proc. 2012-19.

²⁶ Temp. Regs. Sec. 1.263(a)-2T(g)(1). The de minimis rules do not apply to labor and overhead.

²⁷ Temp. Regs. Sec. 1.263(a)-2T(g)(2).

²⁸ Temp. Regs. Sec. 1.263(a)-2T(g)(1).

²⁹ Temp. Regs. Sec. 1.263(a)-2T(g)(1)(iv).

³⁰ Preamble to T.D. 9564, Explanation of Provisions, V.D.

³¹ Temp. Regs. Sec. 1.263(a)-2T(g)(8), Example (1).

³² Id., Examples (2) and (3).

³³ Temp. Regs. Sec. 1.162-3T(f)(1).

³⁴ Temp. Regs. Sec. 1.162-3T(f)(2).

³⁵ Rev. Proc. 2012-19.

³⁶ Temp. Regs. Sec. 1.162-3T(d)(3).

³⁷ Temp. Regs. Sec. 1.263(a)-3T(d).

³⁸ Temp. Regs. Sec. 1.263(a)-3T(e)(2)(ii).

³⁹ Id.

⁴⁰ INDOPCO, Inc., 503 U.S. 79 (1992).

⁴¹ Temp. Regs. Sec. 1.263(a)-3T(d).

⁴² Preamble to T.D. 9564, Background.

⁴³ Temp. Regs. Sec. 1.263(a)-3T(h)(1).

⁴⁴ Preamble to T.D. 9564, Explanation of Provisions, VI.E.1.a.

⁴⁵ Temp. Regs. Sec. 1.263(a)-3T(h)(3)(iii)(A).

⁴⁶ Temp. Regs. Sec. 1.263(a)-3T(h)(3)(iii)(B).

⁴⁷ Temp. Regs. Sec. 1.263(a)-3T(h)(3)(iii)(C).

⁴⁸ Temp. Regs. Sec. 1.263(a)-3T(h)(3)(ii).

⁴⁹ Temp. Regs. Sec. 1.263(a)-3T(h)(4), Examples (13)–(15).

⁵⁰ Id., Examples (6)–(8).

⁵¹ Preamble to T.D. 9564, Explanation of Provisions, VI.C.2. The regulations contain many examples illustrating this provision.

⁵² Preamble to T.D. 9564, Explanation of Provisions, VI.F.3.

⁵³ Temp. Regs. Sec. 1.263(a)-3T(j)(1).

⁵⁴ Dominion Resources, Inc., 48 F. Supp. 2d 527 (E.D. Va. 1999), aff’d, 219 F.3d 359 (4th Cir. 2000).

⁵⁵ Rev. Proc. 2012-19.

⁵⁶ Sec. 168(i)(6).

⁵⁷ Prop. Regs. Sec. 1.168-6(b).

⁵⁸ Preamble to T.D. 9564, Explanation of Provisions, VI.F.3.

⁵⁹ Preamble to T.D. 9564, Explanation of Provisions, VII.

⁶⁰ Temp. Regs. Sec. 1.168(i)-7T(c)(2).

⁶¹ Temp. Regs. Sec. 1.168(i)-7T(c)(2)(i).

⁶² Temp. Regs. Sec. 1.168(i)-7T(c)(2)(ii)(E).

⁶³ Temp. Regs. Sec. 1.168(i)-8T(b)(1).

⁶⁴ Temp. Regs. Sec. 1.168(i)-8T(d)(2).

⁶⁵ Temp. Regs. Sec. 1.168(i)-8T(e)(2).

⁶⁶ Id.

⁶⁷ Temp. Regs. Sec. 1.168(i)-8T(h), Example (5). See also Temp. Regs. Sec. 1.168(i)-8T(g)(3).

⁶⁸ Temp. Regs. Sec. 1.168(i)-8T(d)(1).

⁶⁹ Temp. Regs. Sec. 1.168(i)-1T(e)(3)(iii).

⁷⁰ Temp. Regs. Sec. 1.168(i)-1T(e)(2)(i).

⁷¹ Temp. Regs. Sec. 1.168(i)-1T(l)(1).

⁷² Preamble to T.D. 9564, Explanation of Provisions, VIII.

⁷³ Industry Director Directive LB&I-4-0312-004 (3/15/12).

⁷⁴ Peco Foods, T.C. Memo. 2012-18.

⁷⁵ Former FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, now mostly incorporated in ASC Topic 740, Income Taxes.

	EditorNotes
	Susan Anderson is a professor in the Department of Accounting in the Walker College of Business at Appalachian State University in Boone, N.C. For more information on this article, contact Prof. Anderson at andersonse@appstate.edu.