With Congress only recently returned from recess, there is little in the way of current legislative developments. However, in the regulatory area, the IRS has issued final regulations dealing with the rules for deduction vs. capitalization of tangible property. These regulations are briefly summarized below.
In TD 9636, 09/13/2013, the IRS has issued final regulations that provide guidance on the application of IRC Section 162(a) and IRC Section 263(a) to amounts paid to acquire, produce, or improve tangible property. The final regulations clarify and expand the standards in the current regulations under IRC Sections 162(a) and 263(a). These final regulations replace and remove temporary regulations, and related proposed regulations, and become effective January 1, 2014.
These regulations will affect all taxpayers that acquire, produce, or improve tangible property.
IRC Section 263(a) generally requires the capitalization of amounts paid to acquire, produce, or improve tangible property. IRC Section 162 allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including the costs of certain supplies, repairs, and maintenance.
In issuing the regulations, the IRS noted that “the final regulations provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses. The final regulations retain many of the provisions of the 2011 temporary and proposed regulations, which in many instances incorporated standards from case law and other existing authorities under IRC Sections 162 and 263(a). The final regulations also modify several sections of the 2011 temporary regulations in response to comments received and to clarify and simplify the rules while achieving results that are consistent with the case law.”
Among other things, the regulations define materials and supplies, provide an election to capitalize certain material and supplies, and provide optional treatment for rotable and temporary spare parts.
The regulations also contain some new rules defining what constitutes a “unit of property” for capitalization purposes, and guidance on a “safe harbors” for small taxpayers and routine maintenance. The regulations retain the provisions of the 2011 temporary regulations related to so-called “betterments”, with several refinements.
For additional information regarding this topic, contact your local UHY LLP professional.