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Sweeping New IRS 'Repair Regulations' Impact Most Businesses

February 02, 2012

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property.  They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in-between.  They apply immediately to tax years beginning on or after January 1, 2012.

These so-called "repair regulations" are broad and comprehensive.  They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property.  They are intended to clarify and expand existing regulations, set out some bright-line tests and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property.  The regulations affect manufacturers, wholesalers, distributors and retailers -- everyone who uses tangible property, whether the property is owned or leased.  The rules provide a more defined framework for determining capital expenditures.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change.  The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized.  The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service and transaction costs.  Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than having to capitalize them.  The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property.  For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized.  However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes. Until the IRS issues transition guidance it is unclear what changes taxpayers will need to make to comply with the new regulations.  Once the procedures are issued, BlumShapiro will be providing additional details as to how this change will affect your business and what steps you need to take.

If you have additional questions, please contact Crystal Germanese at or 860-570-6496.


Advisors | Auditors | Consultants | CPAs - Blum Shapiro is one of the premier public accounting firms in the northeast and a Top 100 CPA Firm in the U.S. Our professionals serve businesses, individuals and organizations in Boston (MA), Hartford (CT), Cranston (RI), Shelton (CT) ,Quincy (MA) and Newton (MA) with audit, tax and business consulting services. Our firm has developed practice areas in automotive, construction, education, government, healthcare, hospitality, manufacturing, nonprofit organizations and professional service firms. New Haven CT, Fairfield CT, Norwalk CT, Waterbury CT.