Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The text of the temporary regulations serves as the text of the proposed regulations.

The IRS and taxpayers have often disagreed over how to characterize certain expenditures for tax purposes. The IRS explained that there has been uncertainty over how to determine when expenses may be deducted immediately and when expenses must be capitalized and depreciated over a certain number of years.

The IRS issued regulations in 2006 and then re-proposed the regulations in 2008. Since 2008, the IRS has worked to refine the regulations in light of taxpayer concerns. In late December 2011, the IRS withdrew the 2008 proposed regulations and issued new guidance in the form of temporary and proposed regulations.

The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. In the preamble to new regulations, the IRS acknowledged the highly factual nature of determining whether expenditures are for capital improvements or for ordinary repairs and the difficulty in applying the standards in practice.

The 2011 regulations provide a general framework for capitalization, the IRS explained. The 2011 regulations also provide general rules for capital expenditures, rules for amounts paid for the acquisition or production of tangible property, rules for amounts paid for the improvement of tangible property, and more. Additionally, the 2011 regulations address the definition and treatment of materials and supplies, a de minimis rule for the acquisition and production of property and the safe harbor for routine maintenance.

Please contact our office with any questions about this revised regulation.