Printable versionSend by emailPDF version
April 24, 2012

2012 - Issue 17 - A pattern seems to be developing at the IRS of issuing significant guidance to taxpayers right before major holidays. Most recently, two new revenue procedures under the new tangible property regulations were issued on March 7 — I sure hope it didn’t dampen any of your St. Patrick’s Day spirit. Anyway, as we commented back in the dead — or, for us northeasterners, not so dead — of winter, much was going to be said about these new regulations. To confirm this, all you need to do is google “new tangible property regulations” and you’ll find around 2,500 or so pieces discussing them. While there is no direct correlation between the volume of articles written and the actual changes to your tax accounting for tangible property expenditures under these new regulations, there is no doubt that businesses, particularly corporations with audited financial statements, need to address the new regulations sooner rather than later.

Background

The new temporary regulations are applicable to tax years beginning on or after January 1, 2012, or to amounts paid or incurred in tax years beginning on or after January 1, 2012, as applicable. Thus, beginning in 2012, the popular view is that most taxpayers likely will have to change their method of accounting to conform to these temporary regulations.

Implementation Guidance 

As promised in the preamble to the new temporary regulations, the IRS, on March 7, released two revenue procedures, Rev. Proc. 2012-19 and Rev. Proc. 2012-20, under which taxpayers may obtain automatic consent for a tax year beginning on or after Jan. 1, 2012, to change their method of accounting to implement the temporary regulations. Rev. Proc. 2012-19 focuses on automatic changes with respect to supplies costs, repairs and maintenance costs, capital expenditures, and costs to acquire, produce, or improve tangible property. Rev. Proc. 2012-20 addresses the disposition and depreciation of applicable assets. The new revenue procedures add the method changes set forth therein to the automatic method changes listed in the Appendix to Rev. Proc. 2011-14, which provides general procedures for obtaining automatic consent to method changes. (See the Appendix below for a more detailed discussion of each of the 19 method changes provided for in the revenue procedures).

Audit Protection and the LB&I Directive

Since the new revenue procedures added automatic changes to those already listed in the Appendix to Rev. Proc. 2011-14, they effectively incorporate the provisions of Rev. Proc. 2011-14 and therefore ensure that audit protection will be available for the new changes. Generally, taxpayers obtain audit protection related to prior years upon the filing of Form 3115. However, the Large Business & International Division (LB&I) of the IRS issued a field directive on March 15 that instructed IRS examiners and managers to cease all exam activity related to repair vs. capitalization positions taken in original returns for tax years beginning before January 1, 2012. LB&I has chosen to reserve examinations for issues that arise under the new temporary regulations.

ASC 740 Considerations — Uncertain Tax Positions

ASC 740-10-25-14 requires that changes in the expected outcome of an uncertain tax position be based on new information, and not on a mere reevaluation of existing information. New information can relate to developments in case law, changes in tax law, new regulations issued by taxing authorities, interactions with the taxing authorities or some other development. 

When the temporary tangible property regulations were issued in December 2011, the IRS promised to provide guidance on how to implement them. Since they are prospective, in the absence of implementation guidance from the IRS, there generally should be no financial statement impact for a financial statement period ending prior to the release of the transition guidance on March 7.

Since such “new information” exists as of March 7 in the form of Rev. Proc. 2012-19 and Rev. Proc. 2012-20, the financial accounting impact to potentially be taken into account in the period ended March 31, 2012, will depend on a taxpayer’s intent to make any of the accounting method changes provided therein.

Alvarez & Marsal Taxand Says:

With the issuance of Rev. Proc. 2012-19 and 2012-20 on March 7, as I appropriately quipped in the title of this piece — now, the real fun begins. After coming to grips with the extent of work involved in analyzing the direction your company should be taking with these regulations, the term "March Madness" might take on a whole new meaning. Seriously folks, what should your company be doing now? Here are a few suggestions:

  • Determine the affected departments and processes (i.e., “stakeholders”);
  • Identify internal project team members;
  • Schedule fact-gathering meetings with selected plant and/or business unit fixed-asset accountants;
  • Identify current processes and systems for authorizing, tracking and recording fixed-asset-related expenditures;
  • Analyze potential tax and business issues affected by conformance to the temporary regulations;
  • Start factual development;
  • Perform initial technical research; and
  • Draft an initial work plan for implementation of new methods/elections, computation of 481(a) adjustments, tax return reporting (including Forms 3115 and elections), documentation for IRS exams and financial statement considerations.

APPENDIX

Rev. Proc. 2012-19

Rev. Proc. 2012-19 provides the procedures by which a taxpayer may obtain automatic consent to change to the methods of accounting provided in the temporary regulations relating to methods of accounting for materials and supplies as well as those for repairs vs. capital expenditures. Rev. Proc. 2012-19 is applicable to tax years beginning on or after January 1, 2012.

The changes are generally accomplished with a Section 481(a) adjustment, but in many cases, with some modifications or limitations (some possibly having the effect of a cut-off change). Statistical sampling is broadly referenced in determining the associated 481(a) adjustment (using methodologies accepted by the IRS as detailed in Rev. Proc. 2011-42). The proper capitalization of amounts covered by the change, pursuant to Section 263A and the regulations thereunder, is specifically considered in a number of cases. The scope limitations under Section 4.02 of Rev. Proc. 2011-14 are generally waived for the first or second tax year beginning after December 31, 2011 (e.g., taxpayers under examination are able to file for an automatic method change for their first or second tax year beginning after December 31, 2011). Two of the existing automatic changes in the Appendix to Rev. Proc. 2011-14 — specifically, those in Appendix sections 3.05 (materials and supplies) and 3.06 (repair and maintenance cost) have been removed for years beginning on or after January 1, 2012.

There is no shortage of method change possibilities added by Rev. Proc. 2012-19. Taxpayers have thirteen potential method changes to consider. Specifically, the automatic changes now available in Rev. Proc. 2011-14 include the following:

  • Deduction of repair and maintenance costs
    • Applies to a taxpayer that wants to change from capitalization to deduction for repair and maintenance costs, as well as to a taxpayer that wants to change units of property solely for purposes of determining whether amounts paid or incurred improve a unit of property.
    • Does not apply if the taxpayer is not appropriately capitalizing the repair expenditures under Section 263A; wants to change its method of accounting for dispositions of depreciable property; or wants to change methods with respect to property subject to the repair allowance provided in the Section 167 regulations.
    • A taxpayer making this change must attach to its Form 3115 a schedule for the Section 481(a) adjustment listing the adjustment amounts for each property classification (e.g., five-year property, seven-year property or nonresidential real property). 
  • Change to regulatory accounting method
  • Applies to a regulated taxpayer that wants to change its method of accounting for amounts paid or incurred to repair or maintain tangible property to follow its method of accounting for regulatory accounting purposes to determine whether an amount paid or incurred improves property, consistent with the regulations under Section 263.
  • Does not apply to any tangible property that is not subject to regulatory accounting rules; any property subject to the repair allowance under the Section 167 regulations; or a taxpayer that wants to change its method of accounting for dispositions of depreciable property, including a change in the asset disposed of.
  • Applies to a taxpayer that wants to change its method of accounting for non-incidental materials and supplies to the method of deducting such amounts in the tax year in which they are actually used or consumed.
  • Does not apply to rotable or temporary spare parts.
  • The Section 481(a) adjustment takes into account only amounts paid or incurred in tax years beginning on or after January 1, 2012.
  • Applies to a taxpayer that wants to change its method of accounting for incidental materials and supplies to the method of deducting such amounts in the tax year in which they are paid or incurred.
  • The Section 481(a) adjustment takes into account only amounts paid or incurred in tax years beginning on or after January 1, 2012.
  • Applies to a taxpayer that wants to change its method of accounting for costs to acquire or produce non-incidental rotable and temporary spare parts to the method of deducting such costs in the tax year in which the taxpayer disposes of the parts.
  • The Section 481(a) adjustment takes into account only amounts paid or incurred in tax years beginning on or after January 1, 2012.
  • Deduction of non-incidental materials and supplies when used or consumed
  • Deduction of incidental materials and supplies when paid or incurred
  • Deduction of non-incidental rotable and temporary spare parts when disposed of
  • Change to the optional method for rotable and temporary spare parts
    • Applies to a taxpayer that wants to change its method of accounting for rotable and temporary spare parts to the optional method of accounting for rotable and temporary spare parts described in the temporary regulations under Section 162.
  • Deduction of dealer expenses that facilitate a sale of property
  • Applies to a dealer in property that wants to change its method of accounting for commissions and other costs paid or incurred to facilitate the sale of tangible property to the method of treating such costs as ordinary and necessary business expenses.
  • Does not apply to liabilities incurred to facilitate the disposition of assets that constitute a trade or business.
  • Applies to a taxpayer that wants to change its method of accounting for amounts paid or incurred to acquire or produce (including any amounts paid or incurred to facilitate the acquisition and production of) a unit of property to the method of applying the de minimis rule under the temporary regulations.
  • Does not apply to amounts paid for property that is or is intended to be included in inventory property; amounts paid for land; or start-up expenditures as defined in Section 195.
  • The Section 481(a) adjustment takes into account only amounts paid or incurred in tax years beginning on or after January 1, 2012.
  • Applies to a taxpayer that wants to change its method of accounting from capitalizing to deducting amounts paid or incurred in the process of investigating or otherwise pursuing the acquisition of real property if the amounts meet the requirements of the temporary regulations; or a taxpayer that wants to change its method of accounting from capitalizing to deducting amounts paid or incurred in the process of investigating or otherwise pursuing the acquisition of real property if the amounts are for employee compensation or overhead costs under the temporary regulations.
  • Does not apply to start-up expenditures as defined in Section 195.
  • The Section 481(a) adjustment takes into account only amounts paid or incurred in tax years beginning on or after January 1, 2012.
  • Applies to a taxpayer that wants to change its method of accounting for amounts paid or incurred for routine maintenance performed on a unit of property to the method of treating such amounts as amounts that do not improve the unit of property.
  • Does not apply to a building or a structural component of a building.
  • Applies to a taxpayer that is not a dealer in property and wants to change its method of accounting for commissions and other costs paid or incurred to facilitate the sale of property to the method of capitalizing such costs.
  • Does not apply to amounts paid or incurred to facilitate the disposition of assets that constitute a trade or business.
  • Applies to a taxpayer that wants to change its method of accounting to capitalizing amounts paid or incurred to acquire or produce property under the temporary regulations and, if depreciable, to depreciating such property under Section 168.
  • Deduction of de minimis amounts
  • Deduction of certain costs for the investigation or pursuit of the acquisition of real property
  • Change to the safe harbor for routine maintenance on property other than buildings
  • Non-dealer expenses to facilitate the sale of property
  • Capitalization of acquisition or production costs
  • Capitalization of improvements to tangible property
    • Applies to a taxpayer that wants to change its method of accounting to capitalizing amounts paid or incurred for improvements to units of property consistent with the temporary regulations and, if depreciable, to depreciating such improvements under Section 168.
    • Does not apply to a taxpayer that wants to change its method of accounting for dispositions of depreciable property, including a change in the asset disposed of; or with respect to property subject to the repair allowance under the Section 167 regulations.
    • A taxpayer making this change must attach to its Form 3115 a schedule for the Section 481(a) adjustment listing the adjustment amounts for each property classification (e.g., five-year property, seven-year property or nonresidential real property).

Rev. Proc. 2012-20

Rev. Proc. 2012-20 provides the procedures by which a taxpayer may obtain automatic consent to change to the methods of accounting provided in the temporary regulations relating to depreciating or amortizing leasehold improvements, general asset accounts, property depreciated under Section 168 (Modified Accelerated Cost Recovery System — MACRS — property) and dispositions of MACRS property. The procedure is applicable to tax years beginning on or after January 1, 2012.

Some changes come with a Section 481(a) adjustment, whereas others do not. Again, statistical sampling is allowed in some cases. The proper capitalization of amounts covered by the change, pursuant to Section 263A and the regulations thereunder, again is specifically considered in a number of cases. The scope limitations under Section 4.02 of Rev. Proc. 2011-14 are also generally waived for the first or second tax year beginning after December 31, 2011. There are terms and conditions provided that are specific to public utility property. Finally, two existing automatic changes in the Appendix to Rev. Proc. 2011-14, specifically, those in Appendix Section 6.24 (dispositions of structural components of a building) and 6.25 (dispositions of tangible depreciable assets, other than a building or its structural components), are removed for years beginning on or after January 1, 2012.

Six additional automatic method changes added by Rev. Proc. 2012-20 are now available in Rev. Proc. 2011-14 as follows:

  • Depreciation of leasehold improvements
    • Applies to a taxpayer that wants to change its method of accounting to comply with the temporary regulations for leasehold improvements in which the taxpayer has a depreciable interest at the beginning of the year of change from improperly depreciating the leasehold improvements over the term of the lease (including renewals, if applicable) to properly depreciating these improvements under sections 168, 197, or 167(f)(1), as applicable.
    • The scope limitation in Section 4.02(5) of Rev. Proc. 2011-14 (i.e., “final year of trade or business”) does not apply to a taxpayer that makes this change.
  • Changes from permissible to permissible method for depreciation of MACRS property
  • Applies to a taxpayer that wants to make a change in method of accounting for depreciation that is specified in Section 6.28(3) of the Appendix for an asset to which Section 168 applies (MACRS property); for which the present and proposed methods of accounting are permissible methods of accounting under the temporary regulations, as applicable; and that is owned by the taxpayer at the beginning of the year of change.
  • Does not apply to any property that is not depreciated under Section 168 under the taxpayer’s present and proposed methods of accounting.
  • The scope limitation in Section 4.02(5) of Rev. Proc. 2011-14 (i.e., “final year of trade or business”) does not apply to a taxpayer that makes this change.
  • Numerous changes are specified in Appendix Section 6.28(3), including:
    • For items of MACRS property for which the taxpayer has not made a valid general asset account election:
      • A change from single asset accounts to multiple asset accounts, or vice versa.
      • A change from grouping specific items of MACRS property in multiple asset accounts to a different grouping of the same assets in multiple asset accounts.
      • For the items of MACRS property accounted for in multiple asset accounts, certain changes in the method of identifying which assets have been disposed of.
    • For items of MACRS property for which the taxpayer has made a valid general asset account election:
    • A change from grouping specific items of MACRS property in general asset accounts to a different grouping of the same assets in general asset accounts in accordance with the temporary regulations.
    • Certain changes in the method of identifying which assets have been disposed of.
  • Certain of these changes are made using a modified cut-off method under which the unadjusted depreciable basis and the depreciation reserve of the asset as of the beginning of the year of change are accounted for using the new method of accounting. Others are made using a cut-off method and apply to dispositions occurring on or after the beginning of the year of change.
  • Disposition of a building or structural component
    • Applies to a taxpayer that wants to make a change in method of accounting that is specified in Section 6.29(3) of the Appendix pertaining to the disposition of a building or a structural component. This change also will affect the determination of gain or loss from the disposition of the building or the structural component and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property.
    • Does not apply to any property that is not depreciated under Section 168 under the taxpayer’s present and proposed methods of accounting; any property for which the taxpayer made a valid general asset account election; or any multiple buildings, condominium units, or cooperative units that are treated as a single building under the taxpayer’s present method of accounting, or will be treated as a single building under the taxpayer’s proposed method of accounting, pursuant to the regulations under Section 1250.
    • The scope limitation in Section 4.02(5) of Rev. Proc. 2011-14 (i.e., “final year of trade or business”) does not apply to a taxpayer that makes this change.
    • A number of changes are specified in Appendix Section 6.29(3) concerning a building, condominium unit, cooperative unit, structural component, or an improvement or addition thereto, including:
      • For purposes of applying the temporary regulations regarding the determination of asset disposed of, a change to the appropriate asset as determined under the regulations;
      • For certain disposed assets, if the taxpayer disposed of the asset in a tax year prior to the year of change but continues to deduct depreciation for such disposed asset under the taxpayer’s present method of accounting, a change from depreciating the disposed asset to recognizing gain or loss upon disposition; and
      • Certain changes in the method of identifying which assets have been disposed of from multiple asset accounts.
    • Rev. Proc. 2012-20 indicates specifically that the consent granted for a change specified in Section 6.29(3)(a) of the Appendix is not a determination by the Commissioner that the taxpayer is using the appropriate asset for determining what asset is disposed of by the taxpayer and does not create any presumption that the proposed asset is permissible.
  • Dispositions of tangible depreciable assets in a general asset account
    • Applies to a taxpayer that wants to make a change in method of accounting that is specified in Section 6.31(3) of the Appendix pertaining to the disposition of an asset for which the taxpayer made a valid general asset account election. This change also may affect the determination of gain or loss from the disposition of the asset and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property.
    • Does not apply to any property that is not depreciated under Section 168 under the taxpayer’s present and proposed methods of accounting; or any property for which the taxpayer did not make a valid general asset account election.
    • The scope limitation in Section 4.02(5) of Rev. Proc. 2011-14 (i.e., “final year of trade or business”) does not apply to a taxpayer that makes this change.
    • Numerous changes are specified in Appendix Section 6.31(3) concerning an asset for which the taxpayer made a valid general asset account election:
      • For purposes of applying the temporary regulations regarding the determination of asset disposed of, a change to the appropriate asset as determined under the regulations.
      • A change in the method of identifying which assets have been disposed of from a method of accounting not specified in the temporary regulations to a method of accounting specified therein.
    • Rev. Proc. 2012-20 indicates specifically that the consent granted for a change specified in Section 6.31(3)(a) of the Appendix is not a determination by the Commissioner that the taxpayer is using the appropriate asset for determining what asset is disposed of by the taxpayer and does not create any presumption that the proposed asset is permissible.
  • General asset account elections
  • Applies to a taxpayer that wants to make:
    • A late general asset account election for one or more items of MACRS property placed in service by the taxpayer in a tax year beginning before January 1, 2012;
    • A late election to recognize gain or loss upon the disposition of all of the assets, or the last asset, in a general asset account; or
    • A late election to recognize gain or loss upon the disposition of an item in a qualifying disposition of MACRS property for which the taxpayer made a valid general asset account election.
  • The “late election” method change provisions are applicable only for the taxpayer’s first or second tax year beginning after December 31, 2011, and after such time the making of a late election is not treated as a change in method of accounting.
  • These changes are made with a Section 481(a) adjustment; however, if the taxpayer makes the late general asset account election change specified in Appendix Section 6.32(1)(a)(i) for one or more items of MACRS property owned by the taxpayer at the beginning of the year of change, such change for that property is made using a modified cut-off method under which the unadjusted depreciable basis and the depreciation reserve of the asset as of the beginning of the year of change are accounted for using the new method of accounting.
     

Author:

Paul Helderman
Managing Director, New York
+1 212 763 9760

Gregory Gunderson, Managing Director, and Anthony Piotrowski, Director, contributed to this article