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Sparring with the IRS:The New (Final?) Repair Regulation Rules

Wichita State University Accounting & Auditing Conference

May 19, 2014

Curtis Dean, CPA, MST, CGMA, CFP®Vice President, Tax Research & Special Projects

Allen, Gibbs & Houlik, L.C.

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SPAR – Select Property Acquisitions or Repairs

IRS CPA

Acquisition/production of tangible property

• Capitalize to basis of acquired/produced tangible property:• Amount paid to acquire/produce• Costs to defend or perfect title • Inherently facilitative costs

• Exceptions:• De minimis rule• Materials and supplies deductible under Reg. section

1.162-3T, unless elect to capitalize

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Repairs

Units of Property (UOP)

• Buildings• Componentization

• Structural Part

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Componentization

1. What is componentization?2. Did it exist before?3. If so, when did it leave?4. Is it back?

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Repairs

Units of Property (UOP)

• Personal Property• Functional interdependence standard

• Plant property

– discrete and major function

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B. A. R. rules

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B. A. R. Improvement Standards

Improvement (means

capitalize)

Betterment

Adaptation

Restoration

or or

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Betterment = capitalize

Material addition (e.g., physical enlargement, expansion or extension) to UOP

Correction of material defect that existed prior to acquisition of UOP or arose during production of UOP

Material increase in strength, capacity, productivity, efficiency, quality or output of UOP

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Adaptation = capitalize

Modification of UOP inconsistent with intended ordinary use of UOP when placed in service

Adapts UOP to new or

different use

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Restoration = capitalize

1. Replaces component deducted as loss

2. Replaces component and basis adjusted for sale or exchange

3. Repairs component after casualty if basis adjusted

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Restoration = capitalize

4. Returns UOP to operating condition if in state of nonfunctional disrepair

5. Rebuilds UOP to like-new condition after end of class life

6. Replaces major component or substantial structural part of UOP

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Automatic Accounting Method Changes

Each of these on separate Forms 3115

• #7 – Impermissible to permissible depreciation

• #21 – Removal costs• #196 – Late partial disposition election

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Automatic Accounting Method Changes

All of these on one Form 3115• #184 to #193 covering:

Units of Property

Materials and supplies

Repairs and maintenance

Transaction costs

Etc.

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Key Annual Elections

Statements required:

• De minimis rule safe harbor• Capitalize all repair and maintenance

costs• Small Taxpayer Safe Harbor

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Key Annual Elections

No Statements required:• Capitalize and depreciate rotable spare

parts• Partial Disposition Election

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Dealing with the IRS

Circular 230• Signing returns• Penalty assessment

Circular 230 Disclaimer

Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.

These materials should not be used as a substitute for consultation with competent professional advisors. Before making any decision or taking any action, you should obtain appropriate professional guidance.

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Winners by Split Decision

Questions?