Tangible property costs and repair expenditures Regs.

• Author: Nevius, Alistair M.

On December 23, the IRS issued longawaited temporary and identical proposed regulations (T.D. 9564; REG-168745-03) regarding the treatment of expenditures incurred in selling, acquiring, producing, or improving tangible assets, including rules on determining whether costs related to tangible property are deductible repairs or capital improvements. The temporary regulations affect all taxpayers that acquire, produce, or improve tangible property.

The temporary regulations clarify and expand the standards in the current regulations under Secs. 162(a) and 263(a) and provide rules for applying these standards. They also provide guidance on accounting for, and dispositions of, property subject to Sec. 168 and amend the general asset account regulations.

Distinguishing between expenditures for capital improvements or for deductible ordinary repairs is a highly factual determination, and a number of court cases have set out tests for making the distinction. Because it has been difficult for taxpayers to apply the standards set out in case law, the regulations, and IRS guidance, the IRS issued proposed regulations in 2006 (later withdrawn) and 2008. The new temporary and proposed regulations respond to comments received in response to the prior proposed regulations.

The temporary regulations provide a general framework for capitalization and retain many of the provisions of the 2008 proposed regulations, which in many instances incorporated standards from existing authorities under Sec. 263(a).

Among the changes introduced by the temporary regulations, they revise the rules for determining whether an amount is paid for an improvement to a building, and they revise the rule for determining whether an amount is paid for the replacement of a major component or substantial structural part of a unit of property. The temporary regulations also provide several new rules that were not in the 2008 proposed regulations.

Materials and Supplies

The temporary regulations generally retain the framework in the 2008 proposed regulations for materials and supplies. In response to comments, however, the temporary regulations modify and expand the definition of materials and supplies, provide an alternative optional method of accounting for rotable and temporary spare parts, and provide an election to treat certain materials and supplies under a de minimis rule in Temp. Regs. Sec. 1.263(a)-2T. The temporary regulations also allow a taxpayer to elect to capitalize...