IRS Issues Regulations on Tangible Property Repairs

The Internal Revenue Service has released a long-awaited set of temporary and proposed tangible property repair regulations that could have a significant impact on a wide array of industries.

Utilities, telecommunications companies, manufacturers, retailers, real estate companies and other types of businesses could be affected. The temporary and proposed tangible property regulations under Section 263(a) of the Tax Code were issued in temporary form, so affected taxpayers are required to comply with them.

Many parts of the regulations impose a Section 481(a) adjustment. In addition to clarifying and expanding the current standards under 263(a) for repairs and improvements, the temporary regulations cover a broad range of other tangible property acquisition issues, including a definition of materials and supplies, and a de minimis capitalization threshold, according to an analysis by Ernst & Young. The temporary regulations also provide guidance under Section 168 and amend the general asset account regulations.

An important part of the regulations addresses whether repairs to tangible property or capital are alternatively currently deductible. Other aspects of the regulations address different issues such as how the retirement of components of tangible property are to be taken into account, such as buildings, manufacturing equipment and other equipment used in a business.

The regulations have been in the works for at least seven years. The IRS issued a notice in 2004 indicating that it planned to issue guidance on the matter after a number of cases had gone to court. In 2006, the IRS issued the first set of proposed regulations addressing the treatment of tangible property, and in 2008 the Service re-proposed the regulations.

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