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Change in Accounting Method to Comply with the Tangible Property Regulations

June 08, 2012

Crystal Germanese, CPA
Tax Manager
BlumShapiro

The IRS released two Revenue Procedures, 2012-19 and 2012-20, in March 2012 to explain the procedures by which a taxpayer may obtain IRS's automatic consent to change to the accounting methods provided in recently issued temporary regulations under IRC Section 162 and 263.

The Temporary Regulations apply 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. The temporary regulations include guidance related to the acquisition, production and improvement of tangible property as well as the depreciation and disposition of MACRs property and, therefore, all taxpayers will likely have to change their method of accounting to confirm to the temporary regulations.

Revenue Procedure 2012-19 addresses the changes with regard to the treatment of repair and maintenance, and materials and supplies as a result of the tangible property temporary regulations. Revenue Procedure 2012-20 provides the change in method of accounting procedures related to depreciation and dispositions of property.

Specifically, Revenue Procedure 2012-19 provides method change procedures for the following changes:

  • Deducting repair and maintenance costs;
  • Change to the regulatory accounting method;
  • Deducting non-incidental materials and supplies when used or consumed;
  • Deducting incidental materials and supplies when paid or incurred;
  • Deducting non-incidental rotable and temporary spare parts when disposed of;
  • Change to the optional method for rotable and temporary spare parts;
  • Deducting dealer expenses that facilitate the sale of property;
  • Deducting de minimis amounts (capitalization threshold);
  • Deducting certain costs for investigating or pursuing the acquisition of real property;
  • Change to the safe harbor for routine maintenance on property other than buildings;
  • Non-dealer expense to facilitate the sale of property;
  • Capitalizing and depreciating acquisition or production costs; and
  • Capitalizing and depreciating improvements to tangible property.

Revenue Procedure 2012-20 provides method change procedures for the following changes:

  • Depreciation of leasehold improvements;
  • Changing from one permissible method to another permissible method of accounting for depreciation of MACRS property;
  • Disposition of a building or structural component;
  • Disposition of tangible depreciable assets (other than a building or its structural components);
  • Disposition of tangible depreciable assets in a general asset account; and
  • General asset account elections.

The Revenue Procedures allow taxpayers two years after December 31, 2011 to adopt the method changes provided in the temporary regulations. So calendar year taxpayers can file an automatic method change for the calendar years 2012 and/or 2013. Taxpayers file automatic Change in Accounting Method Form 3115 to adopt the method changes. The IRS has waived scope limitations for the second year so taxpayers that make method changes in their first year can also make a change in the second year to correct if necessary.

The IRS's Large Business and International (LB&I) Division also issued guidance to field agents in the examination of repairs versus capitalization issue. The directive provides that examiners should discontinue current exam activity and not begin any new exams while the waiver period to file the changes is still open until the taxpayer has filed a method change. Once the taxpayer has filed the method change or the waiver period ends, the agents are directed to perform a risk assessment regarding the method change.

Generally the Revenue Procedures require taxpayers changing accounting methods to calculate 481(a) adjustments.  However, certain items require a modified 481(a)/modified cut-off adjustment only applicable to amounts paid or incurred in tax years beginning on or after January 1, 2012. A 481(a) adjustment accounts for the cumulative difference between the existing accounting method and the new method. In other words a catch-up adjustment is calculated by retroactively applying the method change. Generally, a favorable 481(a) adjustment is taken into account in one year and an unfavorable adjustment is generally taken into account over a four-year period. When a method change is based on a cut-off basis, the change applies going forward from that point, and no catch-up adjustment is made. The changes provided by Revenue Procedure 2012-20 generally require a 481(a) adjustment; however, the changes in accounting method for dispositions can be 481(a) adjustments or cut-off based on the taxpayer’s existing method. The adjustment requirement for changes provided by Revenue Procedure 2012-19 is detailed in the chart below.

 

Change Description

Section 481(a) or

Modified Adjustment (beginning 
January 1, 2012)

 

Change Description

Section 481(a) or

Modified Adjustment (beginning  January 1, 2012)

Deducting repair and maintenance costs

481(a)

 

Deducting de minimis amounts

Modified 481(a)

Change to the regulatory accounting method

481(a)

 

Deducting certain costs for investigating or pursuing the acquisition of real property

Modified 481(a)

Deducting non-incidental materials and supplies when used or consumed

Modified 481(a)

 

Change to the safe harbor for routine maintenance on property other than buildings

481(a)

Deducting incidental materials and supplies when paid or incurred

Modified 481(a)

 

Non-dealer expense to facilitate the sale of property

481(a)

Deducting non-incidental rotable and temporary spare parts when disposed

Modified 481(a)

 

Capitalizing and depreciating acquisition or production costs

481(a)

Change to the optional method for rotable and temporary spare parts

481(a)

 

Capitalizing and depreciating improvements to tangible property

481(a)

Deducting dealer expenses that facilitate the sale of property

481(a)

 

 

 

 

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