IRS issues Prop. Regs. on capitalization of improvements to property.The Service has issued proposed regulations under Sec. 263(a) that clarify the treatment of expenditures incurred in selling, acquiring, producing, or improving tangible assets Tangible Asset An asset that has a physical form such as machinery, buildings and land. Notes: This is the opposite of an intangible asset such as a patent or trademark. Whether an asset is tangible or intangible isn't inherently good or bad. (REG-168745-03). The new proposed regulations replace previous controversial proposed regulations that were issued in August 2006 and generated many comments from practitioners. The proposed regulations wade into the issue of when an expense is a deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). repair or maintenance cost versus a capitalizable cost for improvement. The proposed regulations set forth factors to be used in determining whether an expenditure results in "a betterment bet·ter·ment n. 1. An improvement over what has been the case: financial betterment. 2. Law An improvement beyond normal upkeep and repair that adds to the value of real property. or restoration" of the property, which would require the expense to be capitalized. The prior proposed regulations defined a unit of property as "improved" if the costs paid materially increase the value of the unit of property or restore the unit of property. This treatment was criticized for not drawing enough of a bright line. The new proposed regulations attempt to address that criticism by spelling out a new "betterment" standard for determining if there has been a material increase in value. Under the new proposed regulations, taxpayers must capitalize amounts spent that 1. Result in a betterment to a unit of property; 2. Restore a unit of property; or 3. Adapt a unit of property to a new or different use. The new proposed regulations also provide guidance on what is the proper unit of property to which to apply the "betterment or restoration" factors. The new unit-of-property rules are generally based on a "functional interdependence in·ter·de·pen·dent adj. Mutually dependent: "Today, the mission of one institution can be accomplished only by recognizing that it lives in an interdependent world with conflicts and overlapping interests" " standard, similar to that used for depreciation and Sec. 263A purposes. The proposed regulations also provide a complicated de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. rule under which certain small cost items can be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. , and they provide a safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. for certain routine maintenance expenses (Prop. Regs. Sec. 1.263(a)-3). The de minimis rule will be discussed in the July 2008 Tax Clinic. The new rules generally would apply after final regulations are issued. A public hearing has been scheduled for June 24. Alistair M. Nevius, J.D. |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion