Deduct or Capitalize? New Definition for Property Expenditures

Deduct or Capitalize? New Definition for Property Expenditures

Temporary Regulations, effective January 1, 2012, provide guidance on IRC Sections 162 and 263(a), address when amounts paid to acquire, produce, or improve tangible property are deductible or capitalizable. The Regulations modify the "general plan of rehabilitation" doctrine, define a safe harbor for routine maintenance on property other than buildings, and explain how landlords and tenants must capitalize expenses related to leased buildings.

...

Under Treas. Reg. § 1.162-3T, amounts paid to acquire or produce non-incidental materials and supplies are deductible in the taxable year in which the materials and supplies are used or consumed in the taxpayer's operations. Incidental materials and supplies generally are deductible in the tax year in which they are paid, provided no record of consumption is kept, physical inventories at the beginning and end of the year are not taken, and taxable income is clearly reflected. With certain exceptions, a taxpayer may elect to capitalize and depreciate the cost of any material or supply. The election is made on a timely filed return for the year the asset is placed in service by capitalizing the amount when paid and beginning to depreciate the cost in the year placed in service. Note that a change to comply with the regulations is a change in method of accounting to which those provisions apply, meaning that IRS consent is required.

Unless the materials and supplies rule discussed above applies, and subject to a de minimis rule, a taxpayer must capitalize amounts paid to acquire or produce a unit of real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures, including costs for work performed before the date that the unit of property is placed in service by the taxpayer. Amounts paid to facilitate the acquisition (or production) of real or personal property (i.e., paid in the process of investigating or otherwise pursuing the acquisition) must be capitalized. The Regulations list costs that are "inherently facilitative," excluding costs paid for employee compensation or overhead.

The Temporary Regulations also attempt to reflect the large body of case law on the repair versus improvement question. The Temporary Regulations somewhat modify the judicially developed "general plan of rehabilitation" doctrine, providing that indirect costs made at the same time as an improvement, but that do not directly benefit or are not incurred by reason of the improvement, do not have to be capitalized under IRC Section 263(a)...

...

LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 10 pages)

RELATED LINKS: For further discussion on deductibility of expenses, see:

...

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store