IRS Issues Implementation Guidance on Tangible Property Regulations

On January 24th, the IRS issued Rev. Proc. 2014-16 detailing the automatic consent procedures for accounting method changes required or permitted by the final tangible property regulations issued last September (see our Federal Tax Alert, Updated Tangible Property Rules Expand Safe Harbors, Disposition Rules). The final tangible property regulations generally apply to tax years beginning on or after January 1, 2014, but can be applied to the 2012 or 2013 tax years. Rev. Proc. 2014-16 supersedes Rev. Proc. 2012-19.

While a taxpayer is required to apply the final tangible property regulations to tax years beginning on or after January 1, 2014, a taxpayer may apply the final regulations or the temporary regulations (or neither) to tax years beginning on or after January 1, 2012, and before January 1, 2014. Rev. Proc. 2014-16 addresses accounting method changes under both the final and the temporary regulations. Although some accounting methods under the final regulations are virtually the same as those under the temporary regulations, Rev. Proc. 2014-16 provides new automatic change numbers for all method changes under the final regulations.

The more common accounting method changes provided for under Rev. Proc. 2014-16 include (not an all-inclusive list):

  • A change to deducting as repairs and maintenance amounts that were typically capitalized;
  • A change to deducting under the routine maintenance safe harbor amounts that were typically capitalized;
  • A change to capitalizing and depreciating amounts typically deducted as repairs and maintenance;
  • A change to deducting amounts paid for nonincidental materials and supplies in the year they are used; and
  • A change to deducting amounts paid for incidental materials and supplies in the year paid or incurred.

Because of the expansive scope of the tangible property regulations and the accounting method changes required therefrom, Rev. Proc. 2014-16 includes several elements to encourage and facilitate compliance:

Waiver of Scope Limitations – Automatic accounting method change procedures generally are inapplicable in certain situations, such as when a taxpayer is under examination or has changed its accounting method on the same item within the last 5 years. These scope limitations are waived for accounting method changes under Rev. Proc. 2014-16, but only for taxpayers who make the change(s) for taxable years beginning before January 1, 2015.

Simplified Filing Requirements for Small Taxpayers – Taxpayers with average annual gross receipts of $10 million or less are not required to complete certain sections of Form 3115, Application for Change in Accounting Method.

Interaction with 263A Capitalization Rules – The ability to make many automatic accounting method changes, including several of those provided for under now superseded Rev. Proc. 2012-19, is predicated on the taxpayer being in full compliance with the Section 263A uniform capitalization rules. This compliance is not required to make the accounting method changes under Rev. Proc. 2014-16. Rev. Proc. 2014-16 also allows taxpayers in conjunction with changes related to tangible property to change from one of the specific 263A capitalization methods to a reasonable method.

481(a) Adjustment Flexibility – When a taxpayer makes an accounting method change, typically the taxpayer must calculate the cumulative impact of the change on taxable income as of the beginning of the tax year and recognize that change, the 481(a) adjustment, as income or a deduction. Positive 481(a) adjustments (income) must be recognized over four years while negative 481(a) adjustments (deductions) can be recognized in the year of change. Rev. Proc. 2014-16 provides that taxpayers are not required to net positive and negative 481(a) adjustments related to an identified unit of property, thereby allowing the taxpayer the benefit of the negative adjustment in the year of change while the income from the positive adjustment is spread over four years. Rev. Proc. 2014-16 also gives taxpayers flexibility by allowing them to apply the accounting method changes prospectively rather than calculating 481(a) adjustments.

When the final tangible property regulations were issued last fall, several important provisions which were accounting methods under the temporary regulations became annual elections under the final rules. Therefore, they are not impacted by Rev. Proc. 2014-16. Those provisions include elections to:

  • Apply the de minimis safe harbor;
  • Apply the small taxpayer safe harbor;
  • Capitalize repair and maintenance costs;
  • Capitalize materials and supplies; and
  • Capitalize employee compensation and overhead on self-constructed assets.

Rev. Proc. 2014-16 also does not apply to the partial disposition election under the proposed regulations which allows a taxpayer to claim a loss on the remaining cost basis of a retired component of an asset, such as a replaced roof on a building. While IRS officials have intimated that a mechanism will be provided that enables taxpayers to make a late partial disposition election on disposals in earlier years, the IRS and the Treasury Department still have not issued final regulations on dispositions of tangible property nor updated implementation guidance based on the proposed regulations issued last September. Fortunately, taxpayers may still adopt accounting method changes related to dispositions of tangible property under Rev. Proc. 2012-20, including the accounting method allowing taxpayers to deduct a loss on building components that were disposed of in prior years (see our April 2012 InTouch article, New Tangible Property Regulations Impact Tax Accounting for Buildings).

The tangible property regulations impact virtually every business taxpayer with tangible assets. Taxpayers must work closely with their advisors to determine which accounting method changes or elections are required, how to calculate their impact and in which year to make the change. Contact your local CBIZ MHM tax advisor to discuss how to apply these new regulations and implementation procedures to your business.

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