Applying the tangible property regulations for tax year 2015.

• Author: Drucker, Stephen

The IRS issued final tangible property regulations on the deduction and capitalization of expenditures related to tangible property in September 2013 (T.D. 9636) and final tangible property regulations on modified accelerated cost recovery system (MACRS) property dispositions in August 2014 (T.D. 9689). These final regulations are generally effective for tax years beginning on or after Jan. 1,2014 (or for amounts paid or incurred in tax years beginning on or after Jan. 1,2014). The final regulations affect all for-profit taxpayers that have expenditures that are classified as either materials and supplies, repairs and maintenance, asset acquisitions, production of assets, or improvements of tangible assets.

Taxpayers were first required to apply the final tangible property regulations to their tax year 2014 filed returns. Those same taxpayers will now need to continue applying the new rules to their tax year 2015 returns.

Background

Under Sec. 263(a), amounts paid to acquire, produce, or improve tangible property must be capitalized and not deducted. Under Sec. 162(a), a taxpayer may deduct all ordinary and necessary business expenses paid or incurred during the tax year in carrying on a trade or business. The tangible property regulations are intended to provide guidance to taxpayers on whether certain expenditures should be capitalized or deductible as a business expense and to provide them with more objective measurements.

The tangible property regulations under Secs. 263(a) and 162(a) are organized as follows:

* Regs. Sec. 1.162-3--Materials and supplies;

* Regs. Sec. 1.162-4--Repairs and maintenance;

* Regs. Sec. 1.263(a)-1--General rules for capital expenditures;

* Regs. Sec. 1.263(a)-2--Amounts paid for acquisition or production of tangible property; and

* Regs. Sec. 1.263(a)-3--Amounts paid for improvement of tangible property.

The final MACRS tangible property regulations addressed, among other matters:

* Regs. Sec. 1.168(i)-1--Dispositions from a general asset account; and

* Regs. Sec. 1.168(i)-8--Dispositions of tangible property other than from a general asset account.

Materials and Supplies: Regs. Sec. 1.162-3

Materials and supplies are defined in Regs. Sec. 1.162-3(c) as:

* A unit of property costing $200 or less;

* A unit of property with an economic useful life of 12 months or less;

* A component to maintain, repair, or improve a unit of property, including rotable, temporary, and standby emergency parts;

* Fuel, lubricants, water, etc., reasonably expected to be consumed in 12 months or less; and

* Any item identified as a material or supply in other IRS guidance.

Under Regs. Sec. 1.162-3(a), amounts paid to acquire or produce incidental materials and supplies are deductible when those amounts are paid. Amounts paid to acquire or produce nonincidental materials and supplies are deductible in the year the materials and supplies are first used or consumed. Rotable and temporary spare parts are treated as used or consumed when a taxpayer disposes of the parts.

Repairs and Maintenance: Regs. Sec. 1.162-4

Under Regs. Sec. 1.162-4(a), a taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized under Regs. Sec. 1.263(a)-3.

General Rules for Capital Expenditures: Regs. Sec. 1.263(a)-1

Under Regs. Sec. 1.263(a)-1(a), no deduction is allowed for any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. No deduction is allowed for any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. Examples of capital expenditures on personal tangible property can be found in Regs. Secs. 1.263(a)-2 and 1.263(a)-3.

Amounts Paid for Acquisition or Production of Tangible Property: Regs. Sec. 1.263(a)-2

Regs. Sec. 1.263(a)-2 provides rules for applying Sec. 263(a) to amounts paid to acquire or produce a unit of real or personal property. These rules include general requirements to capitalize amounts paid to acquire or produce a unit of real or personal property, requirements to capitalize amounts paid to defend or perfect title to real or personal property, and rules for determining the extent to which taxpayers must capitalize transaction costs related to the acquisition of property.

Amounts Paid for Improvement of Tangible...