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Mary Bernard
Mary Bernard

Repair regs. bring new accounting method change procedures

Two recent revenue procedures detail how to obtain automatic IRS consent for changes to accounting methods for the treatment of tangible property to comply with recent temporary regulations.

March 22, 2012
by Mary F. Bernard, CPA

At the end of 2011, the IRS withdrew 2008 proposed regulations and issued new temporary and proposed regulations on the application of Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property (T.D. 9564) . The guidance includes some bright-line tests, a de minimis rule, and definitions. (For more on the temporary regulations, see Christian, “Repairs and Maintenance New Temporary Regulations,” Corporate Taxation Insider (Jan. 26, 2012).)

This month, the IRS issued Rev. Procs. 2012-19 and 2012-20 to provide procedures for obtaining automatic consent to change to an accounting method to comply with the temporary regulations regarding the treatment of tangible property costs applicable to tax years beginning on or after Jan. 1, 2012. Rev. Proc. 2012-19 applies to accounting changes involving repair and maintenance costs, and Rev. Proc. 2012-20 applies to accounting changes for property depreciated under Sec. 168, MACRS property.

Because taxpayers can file accounting method changes for their treatment of repairs and other tangible property costs, the IRS also told examiners in its Large Business & Industry (LB&I) Division, for tax years beginning before Jan. 1, 2012, to generally stop current exam activity on the issue of whether such costs must be capitalized under Sec. 263(a). For tax years starting in 2012 and 2013, they are to determine if the taxpayer applied for an accounting method change and perform a “risk assessment” to determine whether to start an examination. (For more on this development, see the JofA news story, “IRS Suspends Repair/Capitalization Exams Pending Accounting Method Changes,” March 16, 2012.)

New automatic changes

Rev. Proc. 2012-19 added the following new automatic changes:

  • Deducting repair and maintenance costs (e.g., where such costs have been erroneously capitalized in the past);
  • Changing to the regulatory accounting method;
  • Deducting nonincidental materials and supplies when used or consumed;
  • Deducting incidental materials and supplies when paid or incurred;
  • Deducting nonincidental temporary spare parts when disposed of;
  • Changing to the optional method for temporary spare parts;
  • Deducting dealer expenses that facilitate the sale of property;
  • Deducting de minimis amounts;
  • Deducting certain costs for investigating or pursuing the acquisition of real property;
  • Changing to the safe harbor for routine maintenance on property other than buildings;
  • Capitalizing costs to facilitate the sale of property by nondealers;
  • Capitalizing acquisition or production costs; and
  • Capitalizing improvements to tangible property (e.g., where repair and maintenance expenditures have been erroneously deducted in prior tax years).

Rev. Proc. 2012-20 added the following new automatic changes:

  • Depreciation of leasehold improvements;
  • Changing from one permissible method to another permissible accounting method for depreciation of MACRS property (Sec. 168);
  • Disposition of a building or structural component (Sec. 168);
  • Dispositions of tangible depreciable assets (other than a building or its structural components) (Sec. 168);
  • Dispositions of tangible depreciable assets in a general asset account (Sec. 168(i)(4)); and
  • General asset account elections (Sec. 168(i)(4)).

Filing requirements

The general requirements for automatic changes remain the same—the request for automatic method changes may be filed no earlier than the first day of the year of change and no later than the date the taxpayer files its federal income tax return for the year of change (including extensions), attaching the original Form 3115, Application for Change in Accounting Method. A signed copy of the form must be sent to the IRS center in Ogden, Utah, in lieu of the national office.

Specifics for some of the changes can be found in the related revenue procedures, which are each almost 50 pages. For example, when a concurrent uniform capitalization change is required to ensure compliance with Sec. 263A along with one of the new automatic changes, a taxpayer should file only one Form 3115 including both changes, following the procedures detailed in Rev. Proc. 2011-14, Section 6.02.

Sec. 481(a) adjustment

Generally, these new automatic method changes require a Sec. 481(a) adjustment, although some changes are made on a modified cut-off basis.

A Sec. 481(a) adjustment must be calculated for accounting method changes related to repairs, the regulatory method, and the capitalization of improvements to tangible property. A detailed schedule of the Sec. 481(a) adjustment must be included and may not include any amount attributable to property for which the repair allowance was elected under Regs. Sec. 1.167(a)-11(d)(2).

The following automatic accounting methods require that the Sec. 481(a) adjustment be calculated by taking into account amounts paid or incurred in tax years beginning on or after Jan. 1, 2012:

  • Deduction of nonincidental materials and supplies;
  • Deduction of incidental materials and supplies;
  • Deduction of nonincidental rotable and temporary spare parts;
  • Deduction of de minimis amounts; and
  • Deduction of certain costs for investigating or pursuing the acquisition of real property.

For changes to multiple assets in the same year, Rev. Proc. 2012-20 allows the taxpayer to file a single Form 3115 and provide a single net Sec. 481(a) adjustment for all of the changes included on the form. If a negative Sec. 481(a) adjustment is generated by one or more of the changes on the Form 3115 and the other changes on the form generate a positive Sec. 481(a) adjustment, the taxpayer may include a single negative Sec. 481(a) adjustment for the changes generating that adjustment and a single positive Sec. 481(a) adjustment for the changes that generate that adjustment.

Potential implications

It is apparent that the process of requesting changes in accounting methods can be extremely complex. The issue can be compounded for consolidated groups that may require separate requests due to different current or proposed methods. Taxpayers and practitioners should carefully review the details of the revenue procedures to ensure compliance and to expedite the process. Taxpayers currently under examination, especially those with capitalization issues, should be aware of the implications of the new temporary and proposed regulations, and the LB&I directive suspending certain examinations, which examiners will use as guidance.

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Mary F. Bernard, CPA, is director—income/franchise tax, at the Dallas-based tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, R.I.-based Kahn, Litwin, Renza & Co., Ltd.