IRS unveils new rules on capitalization of tangible assets
The IRS is predicting that new comprehensive proposed regulations on the capitalization of tangible assets will reduce the amount of controversy between taxpayers and the IRS. The long-anticipated regulations clarify and simplify tax rules that impact almost every business.
The regulations introduce "exclusive-factors" tests, rules on economic useful life, safe harbors, and simplified assumptions. The IRS also indicated that it may allow some small cost items to be exempt from capitalization in the future.
More clarification
For many years, businesses and the IRS have disagreed about when some expenses must be capitalized or when they can be immediately deducted. The controversy is especially acute for expenses that improve, repair or rehabilitate property.
The IRS predicts that the proposed regulations will help clarify when expenses for improvements or repairs must be capitalized. This treatment will give taxpayers greater certainty when they invest in new tangible property for their businesses.
Appropriate unit
To determine whether an expense can be capitalized, it is necessary to determine the appropriate unit of property. The question is whether an amount materially increases the property's value. The smaller the unit, the more likely that amount will materially increase the value and will have to be capitalized.
Taxpayers and the IRS frequently disagree on what is the unit and this was not addressed by current regulations. In 2004, the IRS proposed nine categories.
The new regulations reduce the number of categories from nine to four. The four categories are property owned in a regulated industry, buildings and structural components, other personal property, and other real property. There are exceptions for network assets such as tracks used by railroads and transmission lines used by public utilities.
Planning
The IRS emphasized that taxpayers may not change a method of accounting in reliance on proposed regulations until the rules are published as final regulations. If you have any questions about these new regulations and how they impact your business, give our office a call today.
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