To expense or not to expense – that is the question.

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March 30, 2012

Capitalization or repair expense?  IRS issues field memorandum to agents.

In December 2011, the IRS issued temporary regulations that offer guidance on capitalizing or expensing costs incurred in the acquisition, production, or improvement of tangible property.  Recently, the IRS’ Large Business and International (LB&I) Division issued a memorandum to field agents concerning their examination of whether such costs have been properly treated.  This only applies to capitalization vs. repair issues covered by the new proposed regulations.  This does not apply to such expenses when there exists other clear guidance provided by the IRS, separate from these temporary regulations.

For tax years ended prior to 1/1/2012, the field agents are to discontinue any exam activity relating to this issue, withdraw any notice of proposed adjustment involving this issue, and to risk assess the form 3115 (request for accounting method change) if one was filed in response to the proposed regulations, for possible examination.  If a 3115 was not filed, the field agent will direct the taxpayer to file it with the first or second tax return filed after 12/31/2011.

For tax years ending 1/1/2012 through 12/31/2013, the field agent should risk assess the 3115 that was filed in response to the proposed regulations and if not filed, to provide the taxpayer an appropriate time period to file it.  If the time period to file a 3115 has passed, the agent is to risk assess the issues.

For 2014 and beyond, the gloves are off and it’s business as usual.

The full text of the directive can be found at http://www.irs.gov/businesses/article/0,,id=255619,00.html .

For further information, please consult your Aronson tax advisor or call 301.231.6200 for more information on this topic and how it may affect your business.