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New IRS Delays the Effective Date of New Capitalization Regulations
Transitional Rules Give Businesses the Option of Following the New Regulations for 2012 and 2013.
In December 2011, the IRS released Temporary and Proposed Regulations on deduction and capitalization of expenditures related to tangible property. The regulations are extensive, and make numerous changes to the way businesses treat expenditures related to tangible property. The new regulations were to be effective for 2012 taxable years.
Last November, the IRS issued a Notice the effective date of the regulations was being pushed back to 2014. Taxpayers have the option of following the Temporary Regulations for 2012 and 2013 or sticking with the old rules for those years.
Will following the new regulations for 2012 and 2013 allow more deductions of current expenditures? This will vary from business to business. Generally speaking, under the new rules more costs related to personal property will have to be capitalized, while numerous expenditures related to real property, which had to be capitalized under the old rules can now be deducted.
Taxpayers choosing to follow the new regulations may be able to take a write-off in 2012 for their remaining basis in certain assets currently being depreciated.
- If expenditures made in previous years were capitalized, but would have been deductible under the new rules, taxpayers can get a 2012 write-off for their remaining basis.
- If capitalizable expenditures were made in 2012 or earlier years for the replacement of a component of a larger asset, taxpayers can identify their remaining basis in the original component and write that off. This will often be components of a building. Under the old rules, items like furnaces, AC units, water heaters and water softeners acquired with the building could not be written-off separately at the time of replacement. Under the new rules, taxpayers can allocate a portion of their original cost to those components, calculate the remaining basis after depreciation and take a write-off.
Taking these write-offs is considered a change in an accounting method. Making the change requires filing a Form 3115 in conjunction with the tax return for the year.
Deciding whether or not to follow the new rules can be difficult. The potential tax benefit must be weighed against the cost of identifying potential write-offs and filing the Form 3115. You should consult with your SVA professional about determining which option is best for you.