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1
The Final Tangible Property
Regulations
An Overview
Presented by
William C. Harshman
2
Background
• Disputes Between Taxpayers & IRS
• IRS has lost many of the disputes
• Beginning approximately 3 years ago IRS issued Temp Regulations
−
−
Delayed several times
New Final Regulations effective 1/1/14
3
Five major areas of change
• Treatment of amounts paid for improvements to tangible property
• Treatment of expenditures for materials & supplies
• Treatment of repair & maintenance expenditures
• General rules for capital expenditures
• Treatment of amounts paid for purchase/production of tangible
property
4
New Annual Elections
• The final and proposed regulations have many new annual elections including
1.
Election to capitalize and depreciate certain materials and supplies (§1.162-3(d)

2.
A TP may elect to treat as a capital expenditure and to treat as an asset subject to the
allowance for depreciation the cost of any rotable spare part, temporary spare part, or
standby emergency spare part
De minimis safe harbor election (§1.162-3(f)(1)

A TP with and without an AFS may not capitalize any amount paid in the taxable year for
the acquisition or production of a unit of tangible property nor treat as a material or
supply under §1.162-3(a) any amount paid in the taxable year for tangible property if the
amount specified meets the rules ($500 and $5,000 per invoice respectively)
5
New Annual Elections
3.
Election to capitalize amounts paid for employee compensation or
overhead as amounts that facilitate the acquisition of property
(1.263(a)-2(f)(iv)(B))
4.
Safe harbor for small taxpayers (1.263(a)-2(h)(1)

A TP may elect not to capitalize improvements or repairs to an
eligible building property ) if the total amount paid during the
taxable year for repairs, maintenance, improvements, and similar
activities performed on the eligible building property does not
exceed the lesser of— 2% of the unadjusted basis of the eligible
building property; or $10,000
6
New Annual Elections
5.
Election to capitalize repair and maintenance costs(1.263(a)-2(n)(1)

A taxpayer may elect to treat amounts paid during the
taxable/year for repair and maintenance (as defined under
§1.162-4) to/tangible property as amounts paid to improve that
property/under this section and as an asset subject to the
allowance for depreciation if the taxpayer incurs these amounts
in carrying on the taxpayer’s trade or business and if the
taxpayer treats these amounts as capital expenditures on its
books and records
7
New Annual Elections
• Disposition of a portion of an asset (aka partial disposition
• election) (§1.168(i)-8(d)(2)
• A taxpayer may make an election under this paragraph (d)(2) to
• apply this section to a disposition of a portion of an asset
• Must make the election by the due date (including extensions) of
• the original federal tax return for the taxable year in which the
• portion of an asset is disposed of by the TP
• This listing does not include the numerous GAA
• elections addressed in the PRs
8
New Provisions Are Not Elections
• Most of the new final and PR TPRs are not elections, but
rather are method changes first
 Example
 For the Safe harbor for routine maintenance on property
(1.263(a)-2(i)(1) one has to first have the applicable final TPR
method change filed first
• Change procedures for the final TPRs are expected to be
issued in October 2013
9
The Allowed or Allowable Rule
• Points
1. Section 1.1016-3 remains part of the TPRS – the IRS will
use this in their audits of Taxpayers to deny
depreciation deductions
2. Use 2013 (i.e. tax depreciation schedules as of 12-312012) to correct any errors in prior year depreciation,
and
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Errors in Depreciation Fixes
•
Cannot fix depreciation errors by “catching up” on
prior year errors
•
Only filed one return? The taxpayer has not
adopted an accounting method, either
 Previously filed return can be amended to make
the correction, OR
 IRS will allow A CAM by filing a 3115 with the
current year’s return WITH A 481(a) adjustment on
the current year’s return
11
Errors in Depreciation Fixes
•
Filed two (or more) returns?


•
The taxpayer HAS adopted an accounting method
May only file a 3115 to correct
Incorrect depreciation deduction due to a
mathematical or posting error?


A TP is not considered to have adopted an accounting
method regardless of the number of returns that
have been filed
So … May only file amended returns for open years
12
Errors in Depreciation
Gains & Losses
•
The rule requiring basis reduction for unclaimed
(allowable) depreciation applies for purposes of
determining gain or loss

•
When computing depreciation recapture, a TP need not
recapture as ordinary income unclaimed depreciation
A TP should, however, amend returns for open years to
claim any unclaimed depreciation (or to reduce the
amount of depreciation claimed in the open years in the
case of a negative 481(a) adjustment
13
Depreciation Errors and TPR to
Check for that Need Correction
• Bonus depreciation (if taken on some, but not on
all applicable assets – 3115; if not taken but now
want to take = need letter ruling to change;
• Improper lives for assets (need 3115)
• Depreciation taken on assets now owned or
owned (need 3115)
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Index of Regulation Sections
Temporary
•
•
•
•
•
•
1.162-3T = rules for materials and supplies
1.162-4T = rules for amounts paid or incurred for repairs and
maintenance
1.263(a)-1T = general rules for capital expenditures
1.263(a)-2T = rules for amounts paid or incurred for the acquisition
and production of tangible property
1.263(a)-3T = rules for amounts paid or incurred for the
improvement of tangible property
Are effective for taxable years beginning on or after January 1, 2014,
with earlier application permitted
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Index of Regulation Sections
Final and Proposed (PRs)
• 1.162-3 = “Materials and supplies”
• 1.162-4 = “Repairs” (rules for amounts paid or incurred for
repairs and maintenance)
• 1.263(a)-1 = “Capital expenditures; in general”
• 1.263(a)-2 = “Amounts paid to acquire or produce tangible
property”
• 1.263(a)-3 = “Amounts paid to improve tangible property”
16
Index of Regulation Sections
Final and Proposed (PRs)
•
•
•
•
1.263(a)-6 = “Election to deduct or capitalize certain
expenditures”
1.168(i)-1 = GAA
1.168(i)-8 = Dispositions of MACRS property
Are effective for taxable years beginning on or after
January 1, 2014, with earlier application permitted
17
Capitalization
Foundation Rules
• Section 263(a) (relating to the capitalization
requirement) states that no deduction is
allowed for
1. Any amount paid out for new buildings or
permanent improvements or betterments
made to increase the value of any property,
or
2. Any amount expended in restoring property
or in making good the exhaustion thereof for
which an allowance has been made
18
Background …
• 263(a) Regulations state that capital expenditures
include amounts paid or incurred to
 Add to the value, or substantially prolong the useful
life, of property owned by the TP, or
 Adapt the property to a new or different use
 Amounts paid or incurred for incidental repairs and
maintenance of property (as defined by 162 and
§1.162-4 (relating to the deduction for ordinary and
necessary trade or business expenses) are not capital
expenditures under §1.263(a)-1
19
Temporary or Final
Regulations Do Not Change
•
§263(a)

•
§263A and the regulations under §263A

•
Which require TPs to capitalize the direct and allocable
indirect costs, including the cost of materials and supplies, to
property produced or to property acquired for resale
§1.471-1

•
Which requires TPs to capitalize amounts paid to improve
tangible property and
Which requires TPs to include in inventory certain materials
and supplies
§1016 on “use it or lose it” rule
20
Unit of Property (UoP)
• Is a very important element to these and other
regulations
• Does the client first need to change its Unit of
Property before it makes a method change
under the new TPRs?
21
Unit of Property (UoP)
• Unit of Property is a very important issued, why?
 It is an important criteria in the decision whether a Taxpayer
can write off an expenditure as a R& M
• Generally
 The small the Unite of Property the more likely the
expenditure has to be capitalized
• This issue should almost always be considered in TR
issues, most of the time, early
• If your current Unit of Property does not match what
you need/want to do-you must ????? an accounting
method change to get it corrected (T method 162, F
is?)
22
Rules for Determining a UoP
§1.263(a)-3T(e) and -3(e) for Final
For property other than buildings,
• Defines a UoP as consisting of all the components
of the UoP that are based upon the functional
interdependent standard, but there are special
rules for
 Plant equipment, network assets, leased property,
and improvements to property
 Additional rules if
 A Tax Payer has assigned different MACRS classes or
depreciation methods to components of property, or
 Subsequently changes the class or depreciation
method of a component
23
Unit of Property (UoP) for
Buildings 1.263(a)-3(e)(2)
• Building Structure
• Building Systems (9) Defines building systems to
include:
1)
2)
3)
4)
5)
6)
7)
8)
9)
the heating, ventilation, and air conditioning systems (HVAC);
the plumbing systems;
the electrical systems;
all escalators;
all elevators;
the fire protection and alarm systems;
the security systems;
the gas distribution systems; and,
any other systems identified in published guidance.
24
Building and Structural Components
1.263(a)-3T(e)(2) and 3(e)(2) Final
General rule that the UoP for a building is
• T: comprised of the building and its structural
components
• F: each building and its structural components
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Building and Structural Components
1.263(a)-3T(e)(2) and 3(e)(2) Final
Improvements to a building
• T: Requires that a TP apply the improvement standards separately
to the primary components of the building, that is, the building
structure or any of the specifically defined building systems
• F: Requires that a TP apply the improvement rules separately to
the building structure (a building structure consists of the building
and its structural components, other than the structural
components designated as building systems) or its building
systems (these are separate from building structure, and to which
the improvement rules must be applied)
A UoP is a method of accounting
26
Building and Structural Components
1.263(a)-3T(e)(2) and -3(e)(2)
Defines the building structure as
• T: the building (§1.48-1(e)(1)) and its structural components
(§1.48-1(e)(2)) other than the components specifically
enumerated as building systems
• F: each building and its structural components (as defined in
§1.48-1(e)(2)) is a single unit of property (“building”)
A cost is treated as a capital expenditure if it results in an
• T: improvement to the building structure or to any of the
specifically enumerated building systems
• F: improvement to building structure or any of the building
systems
27
Building and Structural Components for
Partial Dispositions (1.168(i)-8(d)(2)
• The proposed regulations (PR) change the unit of
property rule in Temp Reg. §§1.168(i)-1T and1.168(i)-8T
that each structural component of a building,
condominium, or cooperative is the asset for tax
disposition purposes
• The PR provide that a building (including its structural
components), a condominium (including its structural
components), or a cooperative (including its structural
components) is the asset for disposition purposes
28
Further Review of the
Final TPR Issues
• §1.162-3 Rules for materials and supplies;
• §1.162-4 Repairs and maintenance;
• §1.263(a)-1 General rules for capital expenditures;
• §1.263(a)-2 Rules for amounts paid for the
acquisition or production of tangible property;
• §1.263(a)-3 Rules for amounts paid for the
improvement of tangible property
29
Material and Supplies
Reg. §1.162-3
• The F TPRs expand the definition of M & S to include
property that has an acquisition or production cost of
$200 or less (increased from $100), clarify application of
the optional method of accounting for rotable and
temporary spare parts, and simplify the application of the
de minimis safe harbor to M & S
• Add a new definition for “standby emergency spare parts”
• Add a new election to capitalize and depreciate M & S but
limit that capitalize choice to only rotable, temporary and
standby emergency spare parts
30
Material and Supplies
Reg. §1.162-3
• Election to capitalize and depreciate is made on Taxpayer’s timely filed
original tax return
• Taxpayer can make that election item by item
• Final TPRs coordinate the de minimis rules for unites of property
(§1.162-3(f)) and M & S (Reg. §1.162-3(f))
 The Taxpayer must apply the de minimis safe harbor to amounts paid for all M &
S, except for those M & S that the Taxpayer elects to capitalize and depreciate
• Non-incidental and incidental M & S rules of the temporary TPRs remain
• All final M & S require a method change filing
31
Material and Supplies
Reg. §1.162-3
• If a Taxpayer choses to make the election to capitalize and
depreciate certain M & S for its tax year 2012 and 2013,
the Taxpayer can still make the election by filing an
amended return on or before 180 days after the extended
due date, even if the return was not extended
• A Taxpayer may choose to apply the temporary M & S
rules for §1.162-3T for 2012 and 2013
• See Appendix ????? For Final TPR examples, list 1
32
Repair—Reg. §1.162-4
• Is a simple, straight-forward rule, that is the opposite of
capitalization

Amounts paid for repairs and maintenance to tangible property are
deductible if the amounts paid are not required to be capitalized under
Reg. §1.263(a)-3
• Same rule as from temporary TPRs
• A change to comply with this is a change in method of
accounting to which the provisions of §§446 and 481 and the
accompanying regulations apply
• No examples in Final TPRs
33
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• Prior (can apply to 2012 and 2013) de minimis was
not a “safe harbor”
 Taxpayer could deduct certain amounts paid for tangible
property if the Taxpayer had an AFS, had written account
policies for expensing amounts under specific dollar
amounts, and treated those amounts as expenses on its AFS
 Ceiling was the great of
1) 0.1 percent of the Taxpayer’s gross receipts for the tax year as
determined for tax purposes; or
2) 2 percent of the Taxpayer’s total depreciation and amortization
expense for the tax year as determined on the Taxpayer’s AFS
34
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• Final (can apply to 2012 and 2013 but must apply 2014
and after) de minimis safe harbor

Ceiling has been eliminated

New safe harbor determined at invoice item level, but same
on policies for books and records

If AFS, Taxpayer may rely on the de minimis safe harbor only
if the amount paid for property does not exceed $5,1000 per
invoice or per item as substantiated by the invoice

This amount is subject to change by the IRS in future
guidance
35
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• The de minimis safe harbor has been expanded to include
amounts paid for property having an economic useful life or
less than 12 months, provided the amount per invoice or
item does not exceed $5,000
• A $500per item de minimis rule is also included for
taxpayers without an AFS, but still have to have accounting
procedures in place to deduct amounts paid for property
costing less than specified amount or amounts paid for
property with life of 12 months or less
• If cost exceeds $500 per invoice, no portion will qualify for
the safe harbor
36
37
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• Same rule as in the temporary TPRs

The de minimis safe harbor does not precluded a Taxpayer from
reaching an agreement with the IRS that the examining agents will
not review certain items
• Examining agents do not need to revise their materiality
thresholds in accordance with the safe harbor limitation
• The de minimis safe harbor is elected annual by including a
statement on the Taxpayer’s tax return for the year elected
• An election to use the safe harbor may not be made through
the filing of an application for change in accounting method
38
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• For consolidated groups, if a Taxpayer’s financial results are
reported on the AFS for a group of entities, then the group’s AFS
may be treated as the AFS of the Taxpayer
• A Taxpayer is not required to include in the cost of the property
the additional costs if these costs are not included on the same
invoice as the tangible property
• However, a Taxpayer electing the de minimis must included in the
cost of the property all additional costs (for example, delivery
fees, installation services, or similar costs) of acquiring or
producing the property if these costs are included on the same
invoice with the tangible property
39
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• If an invoice includes amounts paid for multiple tangible property and
the invoice includes additional invoice costs related to the multiple
property, then the taxpayer must allocate the additional invoice costs
to each property using a reasonable method
• The de minimis safe harbor must be applied to all eligible M & S
(other than rotable, temporary, and standby emergency spare parts
subject to the election to capitalize or to rotable and temporary spare
parts subject to the optional method of accounting for such part(s) if
the Taxpayer elects the de minimis safe harbor
40
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
• Taxpayers that do no elect the de minimis safe harbor
must treat amounts paid for materials and supplies in
accordance with Reg. §1.162-3
• Taxpayers subject to 263A can not avoid those provision by
using the de minimis
• Safe harbor does not apply to inventory, land items it
capitalizes, and the optional method of rotable parts
• Safe harbor is deducted as ordinary and necessary
expense
41
De Minimis Safe Harbor-Reg. §§1.162-3(f)
and 1.263(a)-1(f) Repairs-Reg. §1.162.4
(Effective Dates)
• Except for the de minimis election, changes apply to taxable years
on or after 1-1-14
• If doing the de minimis election, it will only apply to transactions
after 1-1-14
• Even for the de minimis election, a Taxpayer may choose to adopt to
amounts paid or incurred in taxable years on or after 1-1-12
• Transition rule for de minimis election on 2012 and 2013 returns
apply

A Taxpayer may choose to apply the temporary de minimis rules for Reg.
§1.263(a)-1T for 2012 and 2013
42
Amounts Paid to Acquire or Produce
Tangible Property-Reg. §1.263(a)-2
• Temporary TPRs provided rules for 263(a) to amounts paid to
acquire or produce a unit of real or personal property
• These rules are generally retained in the final TPRs



Requirements to capitalize amounts paid to acquire or produce,
To capitalize amounts paid to defend or perfect title and
The de minimis safe harbor was moved to §1.263(a)-1(f) to reflect its
broader application amounts paid to tangible property, including
amounts paid for improves and M & S, except for those subject to
263A
43
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3
• This final TPR section covers the following sections
a)
Provides the requirement to capitalize amounts paid to improve tangible
property and provides the general rules for determining whether a unit
of property (UoP) is improved
b)
Rules for determining the UoP
c)
Rules for leasehold improvements
d)
Rules for determining improvement costs in particular contexts,
including indirect costs incurred during an improvement, removal costs,
aggregation of related costs, and regulatory compliance costs
44
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3
• This final TPR section covers the following sections
h)
Safe harbor for small taxpayers
i)
Safe harbor for routine maintenance costs
j)
Whether amounts are paid for betterments to UoP
k)
Whether amounts are paid to restore the UoP
l)
Rules for amounts paid to adapt the UoP to a new or different use
m)
An election to capitalize R & M consistent with books and records
n)
an (o) the treatment and recovery of amounts capitalized under this section
p)
and (q) accounting method changes and state the effective/applicability date for the rules of this Section
45
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(d)
• Requirement to capitalize amounts paid for improvements
• A Taxpayer generally must capitalize the related amounts paid
to improve a UoP owned by the Taxpayer
• A UoP is improved if the amounts paid for activities performed
after the property is place din service by the Taxpayer −
1. Are for betterment to the UoP
2. Restore the UoP or
3. Adapt the UoP to a new or different use
46
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• Determining the UoP
• UoP determination is based upon the function interdependence
standard
• Special rules are provided for:




Buildings
Plant property
Network assets
Leased property (leased buildings and leased property other than building),
and
 Improvements to property
47
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• Additional rules are provided if a Taxpayer has assigned
different MACRS classes or depreciation methods to
components of property or subsequently changes the
class or depreciation method of a component or other
item of property.
48
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• Determining the UoP − Leased Building
• In the case of a Taxpayer that is a lessee of all or a portion
of a building such as an office, floor or certain square
footage), the UoP is each building and it structural
components or the portion of each building subject to
the lease and the structural components associated with
the leased portion
49
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• An amount is paid to improve a least building property if the
amount is paid for an improvement, to any of the following
 Entire building, portion of a building
• Other than a building
 All the components that are functionally interdependent comprise a single
UoP
50
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• Determining the UoP − Other
• In the case of plan property, the UoP is further divided into
smaller units comprised of each component (or group of
components) that performs a discrete and major function or
operation within the functionally interdependent machinery or
equipment
• In the case of network assets, UoP is determined by the
Taxpayer’s particular facts and circumstances
• Leased property OT buildings
 UoP may not be larger than the property subject to the lease
51
Amounts Paid to Improve Tangible
Property-Reg. §1.263(a)-3(e)
• Determining the UoP − Improvements
• An improvement to a UoP is not a UoP separate from the UoP improved
• UoP must be treated as a separate UoP if, at the time the UoP is initially
placed in service by the Taxpayer, the Taxpayer has properly treated the
component as being within a different class of property
• In any taxable year after the UoP is initially placed in service by the
Taxpayer, if the Taxpayer or the IRS changes the treatment of that
property (or any portion thereof) to a proper MACRS class or a proper
depreciation method (for example, as a result of a cost segregation study
or a change in the use of the property), then the Taxpayer must change
the UoP determination for that property
52
Improvements to Leased
Property−Reg. §1.263(a)-3(f)
• Taxpayer can apply either the safe harbor for small taxpayers or
de minimis safe harbor to leased property.
• A Taxpayer lessee must capitalize the related amounts that it pays
to improve a leased property except to the extent that section
110 applies to a construction allowance received by the lessee for
the purpose of such improvement or when the improvement
constitutes a substitute for rent
• A Taxpayer lessee must also capitalize the related amounts that a
lessor pays to improve a leased property if the lessee is the
owner of the improvement
53
Special Rules for Determining
Improvement Costs−Reg. §1.263(a)-3(g)
Certain costs incurred during an improvement
• A Taxpayer must capitalize all the direct costs of an
improvement and all the indirect costs (including, for
example, otherwise deductible repair costs) that directly
benefit or are incurred by reason of an improvement
• Indirect costs arising from activities that do not directly
benefit and are not incurred by reason of an improvement
are not required to be capitalized under Section 263(a),
regardless of whether the activities are performed at the
same time as an improvement
54
Special Rules for Determining
Improvement Costs−Reg. §1.263(a)-3(g)
Removal Costs−
• If a Taxpayer disposes of a depreciable asset, including a partial
disposition under Prop. Reg. §1.168(i)-1e)(2)(ix), and has taken into
account the adjusted basis of the asset or component of the asset in
realizing gain or loss, then the costs of removing the asset or
component are not required to be capitalized
• If a Taxpayer disposes of a component of UoP, but the disposal of
the component is not a disposition, then the Taxpayer must deduct
or capitalize the costs of removing the component based on
whether the removal costs directly benefit or are incurred by reason
of a repair to the UoP or an improvement to the UoP
55
Safe Harbor for Small
Taxpayers−Reg. §1.263(a)-3(h)
• Certain Taxpayers may elect to no apply the capitalization requirements to an
eligible building property if the total amount paid during the taxable year for R
& M, improvements, and similar activities performed on the eligible property
does not exceed the lesser of−
i.
ii.
2 percent of the unadjusted basis (is defined in (h)(5) with special rules for leased
property) of the eligible building property; or
$10,000
• “Amount paid” do not include items capitalized under de minimis safe harbor or
those amounts deemed not to improve under the safe harbor for routine
maintenance
56
Safe Harbor for Small
Taxpayers−Reg. §1.263(a)-3(h)
Qualifying Taxpayer−
• In general−the term qualifying Taxpayer means a Taxpayer whose
average annual gross receipts for the three preceding taxable years is
less than or equal to $10,000,000
 Rules for Taxpayers in existence for less than three years
 Short year−annualize
 Gross receipts are defined in the F TPRs
57
Safe Harbor for Small
Taxpayers−Reg. §1.263(a)-3(h)
Election
• Attach a statement to the Taxpayer’s timely filed original
return for the taxable year in which amounts are paid for R &
M, improvements, and similar activities performed on the
eligible building property providing that such amounts qualify
under the safe harbor
58
Safe Harbor for Small Taxpayers – Reg.
§1.263(a)-3(h)
• Safe harbor exceeded
 If total amounts paid by a qualifying TP during the year for R & M,
improvements, and similar activities performed on an eligible building
property exceed the safe harbor limitations, then the safe harbor election is
not available for that eligible building property and the TP must apply the
general improvement rules
Safe Harbor for Routine Maintenance (RM)
Reg. §1.263(a)-3(i)
• An amount paid for RM on a unit of tangible property, or in the case
of a building, on any of the properties is deemed not to improve that
UoP
• RM for a building is the recurring activities that a TP expects to
perform as a result of the use to keep the building structure/system in
its ordinarily efficient operating condition
Safe Harbor for Routine Maintenance
Reg. §1.263(a)-3(i)
• RM activities include
 The inspection, cleaning, and testing of the building structure or each building
system, and
 The replacement of damaged or worn parts with comparable and
commercially available replacement parts
• RM may be performed any time during the useful life of the building
structure or building systems
Safe Harbor for Routine Maintenance
Reg. §1.263 (a)-3(i)
• The activities are routine only if performed more than once during
the 10-year period beginning when placed in service
• Factors to be considered?
 Include the recurring nature of the activity, industry practice, manufacturers’
recommendation, and the TP’s experience with similar or identical property
• With respect to a TP that is a lessor of a building or a part of the
building, the TP’s use of the building UoP includes the lessee’s use of
its UoP
Safe Harbor for Routine Maintenance
Reg. §1.263(a)-3(i)
• RM for property other than buildings is the recurring activities that a
TP expects to perform as a result of the TP’s use of the UoP to keep
the UoP in its ordinarily efficient operating condition
• The activities are routine only if, at the time the UoP is placed in
service by the TP, the TP reasonably expects to perform the activities
more than once during the class life (i.e., the ADS class life) of the
UoP
Safe Harbor for Routine Maintenance
Reg. §1.263(a)-3(i)
• RM does NOT include
 Betterments, replacements where the TP took a loss, sold it, casualty loss,
deteriorated to disrepair, new or different use, etc.
Capitalization of Betterments
Reg. §1.263(a)-3(j)
• An amount is a betterment to a UoP only if it:
 Ameliorates a material condition or defect that either existed prior
 Is for a material addition, including a physical enlargement, expansion,
extension, or addition of a major component to the unit of property or a
material increase in the capacity
 Is reasonably expected to materially increase the productivity, efficiency,
strength, quality, or output
Capitalization of Betterments
Reg. §1.263(a)-3(j) (slide 2)
• Application of betterment rules
 The applicability of each quantitative and qualitative factors to a particular
UoP depends on the nature of the UoP
 For example, if an addition or an increase in a particular factor cannot be
measured in the context of a specific type of property, this factor is not
relevant in the determination of whether an amount has been paid for a
betterment to the UoP
 An amount is paid to improve a building if it is paid for an increase in the
efficiency of the building structure or any one of its building systems (for
example, the HVAC system)
Capitalization of Betterments
Reg. §1.263(a)-3(j) (Slide 3)
• Appropriate comparison
 In cases in which an expenditure is necessitated by normal wear and tear or
damage to the UoP that occurred during the TP’s use of the UoP, the
determination of whether an expenditure is for the betterment of the UoP is
made by comparing the condition of the property immediately after the
expenditure with the condition of the property immediately prior to the
circumstances necessitating the expenditure
Capitalization of Restorations
Reg. §1.263(a)-3(k)
• A TP must capitalize as an improvement an amount paid to restore a
UoP, including an amount paid to make good the exhaustion for
which an allowance is or has been made
• An amount restores a UoP only if it
 Is a replacement where TP deducted a loss, taken into account the basis in a
sale, casualty loss
Capitalization of Restorations
Reg. §1.263(a)-3(k)
 Returns the UoP to its ordinarily efficient operating condition if the property
has deteriorated to a state of disrepair and is no longer functional for its
intended use;
 Rebuilds the UoP to a like-new condition after the end of its class life
 Is for the replacement of a part or a combination of parts that comprise a
major component or a substantial structural part of a UoP
Capitalization of Restorations
Reg. §1.263(a)-3(k)
• The IRS must have thought that this was an important section as it
has 30 examples
•
•
•
•
•
•
•
Replacement of loss and sold components.
Restoration after casualty loss and casualty event
Restoration in a state of disrepair
Rebuild to a like new condition before and after the end of class life
Not a rebuild to a like-new condition
Replacement of major component or substantial structural part
Repair performed during restoration
Capitalization of Restorations
Reg. §1.263(a)-3(k)
• The IRS must have thought that this was an important section as it
has 30 examples – continued
 Numerous examples of not and replacement of major component or
substantial structural part
 Replacement of major component or substantial structural part; windows and
floors
Capitalization of Amounts to Adapt Property to
a New or Different Use-Reg §1.263(a)-3(l)
• A TP must capitalize as an improvement an amount paid to adapt a
UoP to a new or different use
• An amount is paid to adapt a UoP to a new or different use if the
adaptation is not consistent with the TP’s ordinary use of the UoP at
the time originally placed in service by the TP
• Just like in the sections on betterments, restorations, there are no
accounting method changes required to adopt
Election to Capitalize Repair and Maintenance
Costs – Reg §1.263(a)-3(n)
• A TP may elect to treat amounts paid during the taxable year for R &
M to tangible property as amounts paid to improve that property and
as an asset subject to the allowance for depreciation if the TP incurs
these amounts in carrying on the TP’s trade or business and if the TP
treats these amounts as capital expenditures on its books and records
regularly used in computing income
Election to Capitalize Repair and Maintenance
Costs – Reg. §1.263(a)-3(n)
• A TP that elects to apply this in a taxable year must apply this
paragraph to all amounts paid for R & M to tangible property that it
treats as capital expenditures on its books and records in that taxable
year
• Any amounts for which this election is made shall not be treated as
amounts paid for repair or maintenance under §1.162-4
Election to Capitalize Repair and Maintenance
Costs – Reg. §1.263(a)-3(n)
• Election
 By attaching a statement to the TP’s timely original Federal tax return for the
taxable year in which the TP pays amounts applicable
• The statement must be titled “Section 1.263(a)-3(n) Election” and include the
TP’s name, address, TP identification number, and a statement that the TP is
making the election to capitalize repair and maintenance costs under §1.263(a)3(n)
Accounting Method Changes for §1.263(a)-3
• A change to comply with this section is a change of accounting to
which 446 and 481 and the accompanying regulations apply
• A TP seeking to change to a method of accounting in 1.263(a)-3 must
secure the consent of the IRS
Accounting Method Changes for §1.263(a)-3
• Applies to taxable years on or after 1-1-14, except for (h) the safe
harbor for small taxpayers, (m) the optional regulatory method, and
(n) the election to capitalize R & M apply to amounts paid on or after
1-1-14
• Except for (h), (m), and (n), a TP may choose to apply this section to
taxable years beginning on or after 1-1-2012. A TP may choose to
apply (h), (m), and (n) to amounts paid in taxable years beginning on
or after 1-1-2012
Temporary to Final Transition
New Elections
• As the final regulations are generally applicable to 1-1-14 and after,
several sections of the final permit TPs to adopt certain new final TPR
elections for 2012 or 2013, by filing an amended Federal tax return
for the applicable taxable year on or before 180 days from the due
date including extensions of the taxpayer’s Federal tax return for the
applicable taxable year, notwithstanding that the taxpayer may not
have extended the due date
Temporary to Final Transition
New Elections
• Those new elections include those to
1. Capitalize and depreciate certain M & S
2. De minimis safe harbor
3. Election to capitalize amounts paid for employee compensation or overhead
as amounts that facilitate the acquisition of property (1.263(a)-2(f)(iv)(B))
4. Safe harbor for small taxpayers (1.263(a)-2(h)(1))
5. Election to capitalize repair and maintenance costs (1.263(a)-2(n)(1))
6. Disposition of a portion of an asset (aka partial disposition election)
(1.168(i)-8(d)(2))
The Proposed MACRS Disposition Regulations
• Disposition Rules – address
•
•
•
•
•
•
Structural Components
Partial Dispositions – Assets Not Included in General Asset Accounts (GAAs)
Partial Dispositions – Assets Included in GAAs
Components
Disposition Definition
GAAs – Qualifying Disposition Election
• Basis and Identification of Disposed or Converted Asset
• Single Asset Account
Disposition Rules for MACRS
• Structural Components
• The proposed regulations (PR) change the rule in Temp Reg. §1.168(i)1T and 1.168(i)-8T that each structural component of a building,
condominium, or cooperative is the asset for tax disposition purposes
• The PR provide that a building (including its structural components), a
condominium (including its structural components), or a cooperative
(including its structural components) is the asset for disposition
purposes
Disposition Rules for MACRS
• Structural Components
• This rule change, if finalized, allows TPs to forgo a loss upon the
disposition of a structural component of a building without making a
general asset account election as required under the temporary
regulations
• A TP desiring to claim a loss on a retired structural component
outside of a GAA is now required to make a partial disposition
election
• This is a new term and is further described in following slides
Partial Dispositions – Assets Not Included in
General Asset Accounts
• The PRs allow a TP to claim a loss upon the disposition of a structural
component (or a portion thereof) of a building or upon the
disposition of a component (or a portion thereof) of any other asset
(a “partial disposition” of an asset) without identifying the
component as an asset before the disposition by making a partial
disposition election
Partial Disposition – Assets Not Included in
General Asset Accounts
• While the partial disposition rule is generally elective, the rule is
required to be applied to
 Disposition due to casualty event
 Disposition of a portion of an asset for which gain is not recognized in whole
or part under 1031 or 1033
 Sale or transfer of a portion of an asset
Disposition Definition
• The proposed regulations define ”disposition” to provide that a
disposition of a structural component (or a portion thereof) of a
building only if the partial disposition rule applies to the structural
component (or a portion thereof)
GAA
Qualifying Disposition Election
• Temporary TPR’s expanded the definition of a qualifying disposition
on which gain or loss could be effectively recognized to include the
disposition of most assets, including structural components
Basis and Identification of Disposed or
Converted Asset
• Temporary Reg. §1.168(i)-1T and 1.168(i)-8T provide that, where it is
impracticable from the TP’s records to determine the unadjusted
depreciable basis of the disposed-of asset, the TP may use any
reasonable method that is consistently applied to the taxpayer’s
general asset accounts, multiple asset accounts, or larger assets
• Final retain these rules but explain them better
Basis and Identification of Disposed or
Converted Asset
• The PRs provide examples of reasonable methods
1. Discounting the cost of the replacement asset to its placed-in-service year
cost using the CPI;
2. A pro rata allocation of the unadjusted depreciable basis of the GAA or
multiple asset account, as applicable, based on the replacement cost of the
disposed-of asset and the replacement cost of all of the assets in the
general asset account or multiple asset account, as applicable; and
3. A study allocating the cost of the asset to its individual components