[Federal Register Volume 79, Number 139 (Monday, July 21, 2014)]
[Rules and Regulations]
[Pages 42189-42193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17080]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9636]
RIN 1545-BE18
Guidance Regarding Deduction and Capitalization of Expenditures
Related to Tangible Property; Correction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Correcting amendments.
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SUMMARY: This document contains amendments to correct the final
regulations (TD 9636) that provided guidance on the application of
sections 162(a) and 263(a) of the Internal Revenue Code (Code)
regarding the deduction and capitalization of expenditures related to
tangible property. These regulations were published in the Federal
Register on Thursday, September 19, 2013 (78 FR 57686).
DATES: This correction is effective on July 21, 2014, and is applicable
beginning September 19, 2013.
FOR FURTHER INFORMATION CONTACT: Merrill D. Feldstein at (202) 317-5100
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (TD 9636) that are the subject of this
correction provide guidance under sections 162(a) and 263(a) of the
Code to amounts paid to acquire, produce, or improve tangible property
and affect taxpayers that acquire, produce, or improve tangible
property.
In addition to correcting a number of typographical and syntactical
errors, these correcting amendments clarify the manner of electing to
capitalize and depreciate the cost of any rotable spare part, temporary
spare part, or standby emergency spare part under Sec. 1.162-3(d). As
published, Sec. 1.162-3(d)(3) of
[[Page 42190]]
the final regulations could be misleading regarding the manner of
making this election. The election is made by capitalizing the amounts
paid to acquire or produce a material or supply and by beginning to
depreciate the designated amounts under the rules for accounting for
property depreciated under the Modified Accelerated Cost Recovery
System (MACRS) under section 168 (MACRS property). The final
regulations are corrected to clarify this point.
A similar election to capitalize and depreciate the cost of
materials and supplies was provided under Sec. 1.162-3T(d) of the
temporary regulations published in the Federal Register on Tuesday,
December 27, 2011 (TD 9564) (76 FR 81060). While the temporary
regulations (TD 9564) were removed from the Federal Register on
September 19, 2013, in conjunction with publication of the final
regulations (TD 9636), the final regulations permit taxpayers to choose
to apply Sec. 1.162-3T(d) to amounts paid or incurred (to acquire or
produce property) in taxable years beginning on or after January 1,
2012, and before January 1, 2014. The language in Sec. 1.162-3T(d)(3)
describing the manner of electing to capitalize and depreciate the cost
of materials and supplies is similar to the language in Sec. 1.162-
3(d)(3) of the final regulations and could be similarly misleading.
However, because the temporary regulations have been withdrawn, the
language in Sec. 1.162-3T(d)(3) cannot be corrected. Therefore, for
good cause to prevent any confusion for taxpayers who choose to apply
Sec. 1.162-3T(d) as contained in TD 9564 (76 FR 81060) December 27,
2011, to amounts paid or incurred (to acquire or produce property) in
taxable years beginning on or after January 1, 2012, and before January
1, 2014, Sec. 1.162-3(j)(3) is clarified to provide that the manner
for making the election under Sec. 1.162-3T(d)(3) is the same as the
manner for making the election under Sec. 1.162-3(d)(3). In both
cases, the election is made by capitalizing the amounts paid to acquire
or produce designated materials or supplies and by beginning to
depreciate these amounts under the rules for accounting for MACRS
property.
Need for Correction
As published, the final regulations contain errors that may prove
to be misleading and are in need of clarification.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Correction of Publication
Accordingly, 26 CFR part 1 is corrected by making the following
correcting amendments:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.162-3 is amended by:
0
1. Revising the last sentence of paragraph (c)(4)(i).
0
2. Revising the first sentence of paragraphs (c)(4)(ii), (d)(1), and
(d)(2).
0
3. Revising paragraph (d)(3).
0
4. Revising the fourth sentence of paragraph (e)(1).
0
5. In paragraph (j)(3) removing the text ``section'' wherever it
appears and adding ``Sec. '' in its place, and adding two new
sentences after the first sentence of the paragraph.
The revisions and addition read as follows:
Sec. 1.162-3 Materials and supplies.
* * * * *
(c) * * *
(4) * * *
(i) * * * The factors that must be considered in determining this
period are provided under Sec. 1.167(a)-1(b).
(ii) * * * For taxpayers with an applicable financial statement (as
defined in paragraph (c)(4)(iii) of this section), the economic useful
life of a unit of property, solely for the purposes of applying the
provisions of this paragraph (c), is the useful life initially used by
the taxpayer for purposes of determining depreciation in its applicable
financial statement, regardless of any salvage value of the property. *
* *
* * * * *
(d) * * *
(1) * * * A taxpayer may elect to treat as a capital expenditure
and to treat as an asset subject to the allowance for depreciation the
cost of any rotable spare part, temporary spare part, or standby
emergency spare part as defined in paragraph (c)(2) or (c)(3) of this
section. * * *
(2) * * * A taxpayer may not elect to capitalize and depreciate
under this paragraph (d) any amount paid to acquire or produce a
rotable, temporary, or standby emergency spare part defined in
paragraph (c)(2) or (c)(3) of this section if--
* * * * *
(3) Manner of electing. A taxpayer makes the election under this
paragraph (d) by capitalizing the amounts paid to acquire or produce a
rotable, temporary, or standby emergency spare part in the taxable year
the amounts are paid and by beginning to depreciate the costs when the
asset is placed in service by the taxpayer for purposes of determining
depreciation under the applicable provisions of the Internal Revenue
Code and the Treasury Regulations. Section 1.263(a)-2 provides for the
treatment of amounts paid to acquire or produce real or personal
tangible property. A taxpayer must make the election under this
paragraph (d) in its timely filed original Federal tax return
(including extensions) for the taxable year the asset is placed in
service by the taxpayer for purposes of determining depreciation.
Sections 301.9100-1 through 301.9100-3 of this chapter provide the
rules governing extensions of the time to make regulatory elections. In
the case of an S corporation or a partnership, the election is made by
the S corporation or partnership, and not by the shareholders or
partners. A taxpayer may make an election for each rotable, temporary,
or standby emergency spare part that qualifies for the election under
this paragraph (d). This election does not apply to an asset or a
portion thereof placed in service and disposed of in the same taxable
year. A taxpayer may revoke an election made under this paragraph (d)
or made under Sec. 1.162-3T(d), as contained in 26 CFR part 1, revised
as of April 1, 2013, only by filing a request for a private letter
ruling and obtaining the Commissioner's consent to revoke the election.
The Commissioner may grant a request to revoke this election if the
taxpayer acted reasonably and in good faith and the revocation will not
prejudice the interests of the Government. See generally Sec.
301.9100-3 of this chapter. The manner of electing and revoking the
election to capitalize under this paragraph (d) or under Sec. 1.162-
3T(d), as contained in 26 CFR part 1, revised as of April 1, 2013, may
be modified through guidance of general applicability (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter). An election may not be made
or revoked through the filing of an application for change in
accounting method or, before obtaining the Commissioner's consent to
make the late election or to revoke the election, by filing an amended
Federal tax return.
(e) * * *
(1) * * * If a taxpayer uses the optional method for rotable parts
for pools of rotable and temporary spare parts for which the taxpayer
does not use the optional method for its books and records, then the
taxpayer must use the optional method for all its pools in
[[Page 42191]]
the same trade or business, whether rotable or temporary. * * *
* * * * *
(j) * * *
(3) * * * In applying Sec. 1.162-3T(d)(3), as contained in 26 CFR
part 1, revised as of April 1, 2013, a taxpayer makes the election
under Sec. 1.162-3T(d) by capitalizing the amounts paid to acquire or
produce a material or supply in the taxable year the amounts are paid
and by beginning to depreciate the costs when the asset is placed in
service by the taxpayer for purposes of determining depreciation under
the applicable provisions of the Internal Revenue Code and the Treasury
Regulations. The election under Sec. 1.162-3T(d), as contained in 26
CFR part 1, revised as of April 1, 2013, does not apply to an asset or
a portion thereof placed in service and disposed of in the same taxable
year. * * *
0
Par. 3. Section 1.162-4 is amended by revising the last sentence of
paragraph (a) to read as follows:
Sec. 1.162-4 Repairs.
(a) * * * Optionally, Sec. 1.263(a)-3(n) provides an election to
capitalize amounts paid for repair and maintenance consistent with the
taxpayer's books and records.
* * * * *
0
Par. 4. Section 1.263(a)-0 is amended by revising the entry in the
outline of the regulations for Sec. 1.263(a)-2(f)(3)(ii) to read as
follows:
Sec. 1.263(a)-0 Outline of regulations under section 263(a).
* * * * *
Sec. 1.263(a)-2 Amounts paid to acquire or produce tangible property.
* * * * *
(f) * * *
(3) * * *
(ii) Treatment of inherently facilitative amounts allocable to
property not acquired.
* * * * *
0
Par. 5. Section 1.263(a)-1 is amended by:
0
1. Revising the second sentence of paragraph (f)(1).
0
2. Revising paragraphs (f)(1)(i)(B)(2), (f)(1)(ii)(B)(2), (f)(3)(iv),
and (f)(3)(vii).
0
3. Revising the third sentence of paragraph (f)(5).
0
4. Revising the heading of paragraph (f)(7) Example 6.
The revisions read as follows:
Sec. 1.263(a)-1 Capital expenditures; in general.
* * * * *
(f) * * *
(1) * * * However, section 263A and the regulations under section
263A require taxpayers to capitalize the direct and allocable indirect
costs of property produced by the taxpayer (for example, property
improved by the taxpayer) and property acquired for resale.
(i) * * *
(B) * * *
(2) Amounts paid for property with an economic useful life (as
defined in Sec. 1.162-3(c)(4)) of 12 months or less;
* * * * *
(ii) * * *
(B) * * *
(2) Amounts paid for property with an economic useful life (as
defined in Sec. 1.162-3(c)(4)) of 12 months or less;
* * * * *
(3) * * *
(iv) Treatment of de minimis amounts. An amount paid for property
to which a taxpayer properly applies the de minimis safe harbor
contained in this paragraph (f) is not treated as a capital expenditure
under Sec. 1.263(a)-2(d)(1) or Sec. 1.263(a)-3(d) or as a material
and supply under Sec. 1.162-3, and may be deducted under Sec. 1.162-1
in the taxable year the amount is paid provided the amount otherwise
constitutes an ordinary and necessary expense incurred in carrying on a
trade or business.
* * * * *
(vii) Combined expensing accounting procedures. For purposes of
paragraphs (f)(1)(i) and (f)(1)(ii) of this section, if the taxpayer
has, at the beginning of the taxable year, accounting procedures
treating as an expense for non-tax purposes amounts paid for property
costing less than a specified dollar amount and amounts paid for
property with an economic useful life (as defined in Sec. 1.162-
3(c)(4)) of 12 months or less, then a taxpayer electing to apply the de
minimis safe harbor under this paragraph (f) must apply the provisions
of this paragraph (f) to amounts qualifying under either accounting
procedure.
* * * * *
(5) * * * Sections 301.9100-1 through 301.9100-3 of this chapter
provide the rules governing extensions of the time to make regulatory
elections.* * *
* * * * *
(7) * * *
Example 6. De minimis safe harbor; non-invoice additional costs.
* * *
* * * * *
0
Par. 6. Section 1.263(a)-2 is amended by:
0
1. Revising the second sentence of paragraph (d)(1).
0
2. Revising the second sentence of paragraph (f)(2)(iv)(A) and the
fifth sentence of paragraph (f)(2)(iv)(B).
0
3. Revising the heading of paragraph (f)(3)(ii).
0
4. Removing the text ``section'' in the last sentence of paragraph
(h)(2).
The revisions read as follows:
Sec. 1.263(a)-2 Amounts paid to acquire or produce tangible property.
* * * * *
(d) * * *
(1) * * * Section 1.263(a)-3(f) provides the rules for determining
whether amounts are for leasehold improvements.* * *
* * * * *
(f) * * *
(2) * * *
(iv) * * *
(A) * * * However, section 263A provides rules for employee
compensation and overhead costs required to be capitalized to property
produced by the taxpayer or to property acquired for resale.
(B) * * ** Sections 301.9100-1 through 301.9100-3 of this chapter
provide the rules governing extensions of the time to make regulatory
elections. * * *
* * * * *
(3) * * *
(ii) Treatment of inherently facilitative amounts allocable to
property not acquired. * * *
* * * * *
0
Par. 7. Section 1.263(a)-3 is amended by:
0
1. Revising the second and third sentences of paragraph (d) and adding
a new fourth sentence.
0
2. Revising the second sentence of paragraph (e)(2)(i).
0
3. Revising first and third sentences of paragraph (f)(2)(i).
0
4. Revising the first, second, and last sentences of paragraph
(f)(3)(i).
0
5. Removing the eighth sentence of paragraph (g)(2)(ii) Example 3.
0
6. Revising paragraph (h)(4).
0
7. Revising the last sentence of paragraph (h)(5)(ii).
0
8. Revising the second sentence of paragraph (h)(6).
0
9. Revising the first sentence and removing the second sentence of
paragraph (i)(6) Example 3(ii).
0
10. Revising the next to the last sentence of paragraph (j)(3) Example
11 and removing the last sentence of this paragraph.
0
11. Revising paragraphs (k)(1)(v) and (k)(1)(vi).
0
12. Revising the first sentence of paragraph (k)(2).
0
13. Revising the last sentence of paragraph (k)(7) Example 7.
[[Page 42192]]
0
14. Removing the sixth sentence of paragraph (k)(7) Example 30.
0
15. Revising the second sentence of paragraph (n)(2).
The revisions and addition read as follows:
Sec. 1.263(a)-3 Amounts paid to improve tangible property.
* * * * *
(d) * * * However, paragraph (f) of this section applies to the
treatment of amounts paid to improve leased property. Section 263A
provides the requirement to capitalize the direct and allocable
indirect costs of property produced by the taxpayer and property
acquired for resale. Section 1016 provides for the addition of
capitalized amounts to the basis of the property, and section 168
governs the treatment of additions or improvements for depreciation
purposes. * * *
* * * * *
(e) * * *
(2) * * *
(i) * * * Paragraph (e)(2)(iii) of this section provides the unit
of property for condominiums, paragraph (e)(2)(iv) of this section
provides the unit of property for cooperatives, and paragraph (e)(2)(v)
of this section provides the unit of property for leased buildings.
* * * * *
(f) * * *
(2) * * *
(i) * * * A taxpayer lessee must capitalize the related amounts, as
determined under paragraph (g)(3) of this section, that it pays to
improve, as defined under paragraph (d) of this section, a leased
property except to the extent that section 110 applies to a
construction allowance received by the lessee for the purpose of such
improvement or when the improvement constitutes a substitute for rent.
* * * A taxpayer lessee must also capitalize the related amounts that a
lessor pays to improve, as defined under paragraph (d) of this section,
a leased property if the lessee is the owner of the improvement, except
to the extent that section 110 applies to a construction allowance
received by the lessee for the purpose of such improvement. * * *
* * * * *
(3) * * *
(i) * * * A taxpayer lessor must capitalize the related amounts, as
determined under paragraph (g)(3) of this section, that it pays
directly, or indirectly through a construction allowance to the lessee,
to improve, as defined in paragraph (d) of this section, a leased
property when the lessor is the owner of the improvement or to the
extent that section 110 applies to the construction allowance. A lessor
must also capitalize the related amounts that the lessee pays to
improve a leased property, as defined in paragraph (e) of this section,
when the lessee's improvement constitutes a substitute for rent. * * *
See paragraph (e)(2) of this section for the unit of property for a
building and paragraph (e)(3) of this section for the unit of property
for real or personal property other than a building.
* * * * *
(h) * * *
(4) Eligible building property. For purposes of this section, the
term eligible building property refers to each unit of property defined
in paragraph (e)(2)(i) (building), paragraph (e)(2)(iii)(A)
(condominium), paragraph (e)(2)(iv)(A) (cooperative), or paragraph
(e)(2)(v)(A) (leased building or portion of building) of this section,
as applicable, that has an unadjusted basis of $1,000,000 or less.
(5) * * *
(ii) * * * Section 1.263(a)-4(f)(5)(ii) provides the factors that
are significant in determining whether there exists a reasonable
expectancy of renewal for purposes of this paragraph.
(6) * * * Sections 301.9100-1 through 301.9100-3 of this chapter
provide the rules governing extensions of the time to make regulatory
elections. * * *
* * * * *
(i) * * *
(6) * * *
Example 3. * * *
(ii) The additional aircraft engines are rotable spare parts
under Sec. 1.162-3(c)(2) because they were acquired separately from
the aircraft, are removable from the aircraft, and are repaired and
reinstalled on other aircraft or stored for later installation. * *
*
* * * * *
(j) * * *
(3) * * *
Example 11. * * * Under paragraph (g)(4) of this section, City
C's new requirement that K's building meet certain safety standards
to continue to operate is not relevant in determining whether the
amount paid improved the building.
* * * * *
(k) * * *
(1) * * *
(v) Results in the rebuilding of the unit of property to a like-new
condition as determined under paragraph (k)(5) of this section after
the end of its class life as defined in paragraph (i)(4) of this
section; or
(vi) Is for the replacement of a part or combination of parts that
comprise a major component or a substantial structural part of a unit
of property as determined under paragraph (k)(6) of this section.
(2) * * * An amount is paid to improve a building if it is paid to
restore, as defined under paragraph (k)(1) of this section, a property
specified under paragraph (e)(2)(ii) (building), paragraph
(e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or
paragraph (e)(2)(v)(B) (leased building or portion of building) of this
section. * * *
* * * * *
(7) * * *
Example 7. * * * However, paragraphs (k)(1)(vi) and (k)(6) of
this section are applicable for determining whether any amounts must
be capitalized because they are paid for the replacement of a major
component or a substantial structural part of the unit of property.
* * * * *
(n) * * *
(2) * * * Sections 301.9100-1 through 301.9100-3 of this chapter
provide the rules governing extensions of the time to make regulatory
elections. * * *
0
Par. 8. Section 1.263A-1 is amended by revising paragraph (l) to read
as follows:
Sec. 1.263A-1 Uniform capitalization of costs.
* * * * *
(l) Effective/applicability date--(1) In general. Except as
provided in (l)(2), (l)(3), and (l)(4) of this section, the effective
dates for this section are provided in paragraph (a)(2) of this
section.
(2) Mixed service costs; self-constructed tangible personal
property produced on a routine and repetitive basis. Paragraphs
(h)(2)(i)(D), (k), and (l)(2) of this section apply for taxable years
ending on or after August 2, 2005.
(3) Costs allocable to property sold; indirect costs; licensing and
franchise costs. Paragraphs (c)(5), (e)(3)(i), and (e)(3)(ii)(U) of
this section apply for taxable years ending on or after January 13,
2014.
(4) Materials and supplies--(i) In general. The last sentence of
paragraphs (e)(2)(i)(A) and (e)(3)(ii)(E) of this section, and
paragraph (l)(4) of this section apply to amounts paid (to acquire or
produce property) in taxable years beginning on or after January 1,
2014.
(ii) Early application of this section. A taxpayer may choose to
apply the last sentence of paragraphs (e)(2)(i)(A) and (e)(3)(ii)(E) of
this section, and paragraph (l)(4) of this section to amounts paid (to
acquire or produce property) in taxable years beginning on or after
January 1, 2012.
[[Page 42193]]
(iii) Optional application of TD 9564. A taxpayer may choose to
apply Sec. 1.263A-1T(b)(14), the introductory phrase of Sec. 1.263A-
1T(c)(4), the last sentence of Sec. 1.263A-1T(e)(2)(i)(A), the last
sentence of Sec. 1.263A-1T(e)(3)(ii)(E), Sec. 1.263A-1T(l), and Sec.
1.263A-1T(m)(2), as these provisions are contained in TD 9564 (76 FR
81060) December 27, 2011, to amounts paid (to acquire or produce
property) in taxable years beginning on or after January 1, 2012, and
before January 1, 2014.
Martin V. Franks,
Branch Chief, Publications and Regulations Branch, Legal Processing
Division, Associate Chief Counsel (Procedure and Administration).
[FR Doc. 2014-17080 Filed 7-18-14; 8:45 am]
BILLING CODE 4830-01-P