Many recent news headlines have focused on the potential upcoming “fiscal cliff,” the result of the expiration of Bush-era tax provisions at the end of 2012, as well as Obamacare tax provisions generating higher Medicare taxes on net investment income and increased payroll tax on higher income wage earners in 2013 and beyond.
Such issues are clearly important to those who will potentially be impacted. And it remains to be seen the extent to which the results of the recent election will impact the variety of outlooks for both short- and long-term legislative changes that could materially change outcomes.
In December 2011, the Internal Revenue Service released temporary and proposed regulations revising its interpretation of rules relating to the determination of the timing of deductions for expenditures connected with repairs and maintenance of both real and personal property, as well as costs incurred in connection with the acquisition, production, or improvement of such property. These new provisions are generally effective Jan. 1, 2012, and have gone unnoticed by the many taxpayers who will likely be affected this tax year. This includes many construction industry enterprises which, depending upon trade specialty, may have very substantial investments in fixed assets and incur material annual costs to keep such assets in good working order. The political debate about legislative changes to our current tax code has not addressed the more quiet changes afoot from the IRS’ administrative ruling process.
Compliance with the new rules will require a review of historical practices and existing policies and will, at a minimum, present new administrative challenges. New concepts such as unit of property will require consideration and present new implications in determining whether the expenditure should be deducted currently or capitalized. The task of tracking capitalized costs will also become more burdensome.
The new regulations do provide a de minimus exception intended to exclude relatively modest expenditures from capitalization requirements. However, qualification provisions require the existence of a written policy statement and consistency in treatment in audited financial statements, or equivalent financial reporting to governmental agencies. Users of financial statements of many private businesses are willing to rely upon lower level attest services — for example, a review rather than an audit — which will not satisfy the financial statement consistency component of the de minimus rule. In addition, a relatively low ceiling will apply in determining the overall annual costs qualifying for the de minimus rule.
The new regulations present interesting opportunities for acceleration of tax deductions relating to costs that may have been capitalized in the past. A commonly cited example references the replacement to a building component, such as a roof, carried out at some point in the past, wherein the cost of the original component had not previously been claimed as a loss.
This past spring, the IRS issued two revenue procedures outlining transition rules for taxpayers choosing to change their historical accounting practices to conform to the new regulations. These pronouncements cover the filing of Form 3115 to make such changes. Most business taxpayers will be required to file one or more Form(s) 3115, with some interesting planning options in choosing whether to do so for either 2012 or 2013.
We are prepared to assist you with understanding the impact of the new regulations for your company and assist you in evaluating any accounting method changes that may be appropriate.
Michael R. Viens can be reached at Email or 215.441.4600.