Press Room: Tax Release

February 03, 2014

IRS Issues Rules for Implementing the New Fixed Asset Regulations

IRS released Rev. Proc. 2014-16, which provides rules for taxpayers to make accounting method changes related to the tangible property repair regulations. Rev. Proc. 2014-16 is designed to help taxpayers further analyze their current methods of accounting and implement any necessary changes. The revenue procedure contains 21 specific automatic method changes, although most taxpayers will only need to make three to five of them. Additional rules are provided for small taxpayers with gross receipts of $10 million or less.

 

Details of the Revenue Procedure

Rev. Proc. 2014-16 provides that all taxpayers must comply with the final repair regulations beginning with their first tax year that begins on or after January 1, 2014. However, taxpayers have several options for taxable years beginning on or after January 1, 2012, and before January 1, 2014. For any of these earlier tax years, a taxpayer may (1) continue with its existing methods of accounting, (2) adopt the 2011 temporary regulations, or (3) early adopt the final regulations.

As anticipated, the revenue procedure includes the following:

  • Accounting method change rules for repairs
  • Use of statistical sampling for purposes of computing the Sec. 481(a) adjustment (when necessary)
  • Transition rules for Forms 3115, Application for Change in Accounting Method, filed under Rev. Proc. 2012-19

Taxpayers that wish to change a method of accounting to comply with the final regulations or temporary regulations related to the following items may make a change in method of accounting under the new revenue procedure:

  • Materials and supplies (Reg. 1.162-3 and Reg. Sec. 1.162-3T)
  • Repairs (Reg. 1.162-4 and Reg. 1.162-4T)
  • Capital expenditures (Reg. 1.263(a)-1 and Reg. 1.263(a)-1T)
  • Amounts paid to acquire or produce tangible property (Reg. 1.263(a)-2 and Reg. 1.263(a)-2T)
  • Amounts paid to improve tangible property (Reg. 1.263(a)-3 and Reg. 1.263(a)-3T)
  • Producers’ use of a reasonable method for UNICAP for self-constructed assets (Reg. 1.263A-1(f)(A))
  • Capitalized costs for real property acquired through foreclosure (Sec. 263A(b)(2) and Reg. 1.263A-3(a)(1)

The new revenue procedure adds the method changes to the automatic method changes listed in the Appendix to Rev. Proc. 2011-14. If a taxpayer makes any of these method changes for a tax year beginning before January 1, 2015, the scope limitations in Sec. 4.02 of Rev. Proc. 2011-14 will not apply (e.g., limitations for taxpayers who are under exam, before Appeals or a Federal Court, with respect to taxpayers who have made a change in the same item during prior five years, etc.).

Action

The new final tangible property regulations can be very beneficial and can provide overall simplification. Implementation of the new rules generally can be done on an automatic basis; however, it will be somewhat complicated. In addition, the final regulations include various annual elections that can be made for 2014 (or in some cases for 2013 and 2012) that are not considered methods of accounting. We are still anticipating procedural guidance for implementing the proposed regulations on dispositions under Sec. 168(i).