The IRS has deferred the effective date of new tangible property regulations from tax years beginning on or after January 1, 2012, to tax years beginning on or after January 1, 2014. The new regulations were issued in December 2011 to guide taxpayers on how to account for amounts paid to acquire, produce, or improve tangible property. Below is a summary of the new guidance.
The new guidance (as published in Notice 2012-73) delays the mandatory effective date of the tangible property regulations to tax years beginning on or after January 1, 2014. The guidance also notifies taxpayers that final regulations will likely be issued in 2013, which will apply to taxable years beginning on or after January 1, 2014. For taxable years beginning on or after January 1, 2012, taxpayers may apply the provisions of either the already existing temporary regulations or the anticipated final regulations.
Recognizing that taxpayers are expending resources to comply with the temporary regulations, the IRS also indicated that certain sections of the temporary regulations may be revised and in certain cases simplified when the regulations are issued in final form. The areas below were specifically noted by the IRS.
- De Minimis Rule – Under the current regulations, taxpayers with an applicable financial statement, such as a certified audited statement, may claim a current deduction for the cost of acquiring items, including materials and supplies. The amount that may be expensed annually under a taxpayer’s policy is subject to a limitation based on the greater of 0.1 percent of gross receipts or 2 percent of book depreciation and amortization.
- Rules Related to Asset Disposition – The new regulations permit taxpayers to claim a loss deduction for the retirement of a structural component. The regulations allow a taxpayer to use a reasonable method in determining the basis of an asset for the purpose of determining the deduction.
- Safe Harbor for Routine Maintenance – A taxpayer may deduct an amount paid to keep a property in its ordinary operating condition if the taxpayer reasonably expects to perform the activities more than once during its life when it is placed in service.
Taxpayers who choose to apply the temporary regulations to the 2012 tax year may continue to obtain automatic consent to change their methods of accounting under previous guidance.
In light of these and other potential planning and implementation issues, taxpayers have the opportunity to early adopt either the entire regulations or select provisions depending on each taxpayer’s unique tax situation. Regardless of whether taxpayers decide to early adopt or wait until 2014, they should begin to analyze how they will be affected and start to develop the necessary systems to track the information needed for the eventual implementation of the final regulations.