March 19, 2012

IRS Releases Rules for Filing Method Changes Under New Repair Regulations

By Diane Giordano, Partner, Tax & Business Services and Robert Spielman, Partner, Tax & Business Services

IRS Releases Rules for Filing Method Changes Under New Repair Regulations

On March 7, 2012, the IRS issued two revenue procedures providing taxpayers guidelines for filing accounting method changes under the new “repair” regulations.

On December 23, 2011, new IRS temporary regulations were issued to determine when costs are required to be capitalized as property or deducted as repair and maintenance costs. These regulations are commonly referred to as the “repair” regulations and are effective for years beginning after January 1, 2012.

The regulations clearly define a unit of property and the tests to determine if property was improved, and how to apply the tests to a building, its structural components and business systems, such as HVAC, plumbing, electrical, escalators, elevators, and fire, alarm and security systems.

The new regulations provide rules and examples to determine if expenditures result in a betterment, rehabilitation or restoration to a unit of property-which would result in capitalization. Certain costs would be deductible under a de minimis rule if the expenses are less than or equal to the greater of:

  • 0.1 percent of the taxpayer’s gross receipts for the taxable year, as determined for Federal income tax purposes; or
  • 2.0 percent of the taxpayer’s total depreciation and amortization expense for the taxable year

The regulations also include a routine maintenance safe harbor rule.

The new repair regulations will impact certain taxpayers’ methods of accounting for capitalizing costs or deducing the expenditures as repairs and maintenance. The recently issued revenue procedures provide guidance for automatic changes in methods and how the adjustment should be accounted for in future years.