Implementing the New Tangible Property Regulations: The Revised "Repair Regs." Require Thorough Assessment

[ILLUSTRATION OMITTED] After nearly a decade in the making, the final tangible property regulations have arrived. These regulations will affect every taxpayer that uses tangible property in its business. The rules are all-encompassing and complex, and implementation will require careful consideration each taxpayer's and circumstances. In addition, taxpayers may need to devise new collection procedures to capture the necessary data to implement these regulations. On top that, Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.ER. Part 10), may present challenges to practitioners in signing tax returns for clients that have not implemented the final regulations. Due to the challenges the regulations, waiting to address these issues until completing the 2014 tax return is ill-advised. This article provides some history context, and a high-level overview the major components the final regulations and discusses the implications for Circular 230 and signing tax returns for clients who have not implemented the new regulations. A HIGHLY FACTUAL DETERMINATION Since the inception the Internal Revenue Code, the IRS and taxpayers have been at odds over whether expenditures on tangible property are currently deductible or must be capitalized and recovered through depreciation over time. The distinction between deductible repairs and capital improvements has been determined largely through case law and is based on and circumstances. The Supreme Court has held that determining whether expenditures are for capital improvements or for ordinary repairs is highly factual. Whether expenses are capital or ordinary is a matter of degree and not kind (Welch, 290 U.S. 111, 114 (1933)), and each case turns on its special facts (Deputy v. DuPont, 308 U.S. 488,496 (1940)). The IRS issued the final regulations ('I.D. 9636) in September. They are generally applicable to tax years beginning on or after Jan. 1, 2014, and optionally in their temporary form to tax years beginning after 2011. The prior rules can be summarized as follows: Currently deductible repair and maintenance expenses are those incurred for the purpose keeping property in an ordinarily efficient operating condition over its probable useful life for the uses for which the property was acquired. Capital expenditures, in contrast, are for replacements, alterations, improvements, or additions that appreciably prolong the life the property, materially increase its value, or make it adaptable to a different use. Restated, expenditures that restore the property to its operating state are a deductible repair. However, expenditures that provide a more permanent increment in longevity, utility, or worth the property are more likely capital. For example, if a taxpayer rebuilds a business vehicle's engine, the IRS generally considers those expenditures to be capital. In the IRS's view, rebuilding an engine increases the value the vehicle (the unit property) and prolongs its economic useful life. By comparison, the IRS views regularly scheduled maintenance repairs on a business vehicle currently deductible, as they do not materially increase the vehicle's value or appreciably prolong its useful life. GUIDANCE In an effort to reduce disputes with taxpayers, the IRS issued Notice 2004-6 in late 2003 announcing that it intended to propose regulations in this area. The notice identified issues and invited public comments. In response to received comments, the IRS issued proposed regulations in 2006 but withdrew them in 2008 when it issued new proposed regulations. The IRS withdrew those proposed regulations in 2011, when it issued temporary regulations that were effective for tax years beginning on or after Jan. 1, 2012. Just before the end 2012, the IRS amended the temporary regulations to delay the effective date to tax years beginning on or after Jan. …