written by Aaron Henry

The final “repair” regulations were released by the IRS and became effective January 1, 2014. These regulations provide significant changes to the rules on capitalizing and deducting costs incurred with respect to tangible property. The regulations apply to amounts paid to acquire, produce, or improve tangible property. Every business is affected, especially those that have a large amount fixed assets.

Required and elective changes

There are three categories of changes under the regulations:

  1. Changes that are required and are retroactive, with full adjustments under Code Sec. 481(a), in effect applying the regulations to previous years
  2. Required changes with modified or prospective Code Sec. 481(a) adjustment beginning in 2014
  3. Elective changes not requiring any adjustments under Code Sec. 481.

Required changes with full adjustments include unit of property changes, deducting repairs (including the routine maintenance safe harbor), deducting dealer expenses that facilitate the sale of property, the optional method for rotable spare parts, capitalizing improvements, and capitalizing certain acquisition or production costs. If they are capitalized for financial accounting purposes, elective changes can include capitalizing repair and maintenance costs.

Rev. Proc. 2014-16
The IRS issued Rev. Proc. 2014-16, which grants automatic consent to taxpayers to change their accounting methods to comply with the final regulations. Rev. Proc. 2014-16 applies to all the significant provisions in the final regulations, such as repairs and improvements; materials and supplies, including rotable and temporary spare parts; and costs that have to be capitalized as improvements.

Rev. Proc. 2014-16 provides 14 automatic method changes for the repair regulations. Taxpayers may file for automatic consent on a single Form 3115, even if they are making changes in more than one area. The normal scope limitations on changing accounting methods are not applicable when the taxpayer makes one or more changes for any tax year beginning before January 1, 2015. Normally, scope changes would apply if the taxpayer is under examination, is in the final year of a trade or business, or is changing the same accounting method it changed in the previous five years.

Filing deadlines
For prior years, the 2011 proposed and temporary (TD 9564) regulations or the 2013 final regulations can apply to either 2012 or 2013. Taxpayers are allowed to do this on a section-by-section basis. If the taxpayer decides to apply the final or temporary regulations to 2013, they must file for an automatic change of accounting method (Form 3115) by September 15, 2014. Taxpayers applying the regulations to 2014 must file for an automatic change by September 15, 2015. (Both dates apply to calendar-year taxpayers.) The effective date of the regulations is unlikely to be postponed by the government.

For more information regarding these regulations, please contact us at 417-881-0145.