On Tuesday, November 20, 2012, the IRS issued Notice 2012-73 relating to the temporary regulations for the deduction and capitalization of expenses relating to the acquisition, renovation, or improvement of real estate.
Notice 2012-73 informs us that the IRS will be issuing permanent rules at some point during 2013. Additionally, the IRS is anticipating the permanent regulations will have an effective date of January 2014, which will replace the January 2012 effective date of the temporary regulations (issued at the end of 2011). We expect the final regulations will include further clarification on several items and finally provide some conclusive guidance as to whether an expense is deductible as a repair or must be capitalized as an improvement.
Taxpayers can choose to apply the temporary rules as they stand now or wait to analyze the new rules and decide the best way to implement. However, it is important to note that although the IRS identified three areas that may be revised in the final regulations – De Minimis Rule §1.263(a)-2Tg; Dispositions §1.168(i)-1T and -8T; and Safe Harbor for Routine Maintenance §1.263(a)-3Tg – until the rules are finalized anything issued in these sections of the temporary regulations may be subject to change. Therefore, any changes in accounting method made in accordance with the temporary regulations might not be the same after the permanent rules are finalized. The Notice does state the IRS will provide for accounting method changes after the new regulations are issued, but gave no indication as to what that might entail.
Until last week, many accounting firms were aggressively promoting the need to implement accounting method changes for General Asset Accounts. Given the released Notice, the urgency has essentially disappeared. However, the temporary regulations do suggest how assets should be classified in order to enable taxpayers and their advisors to make informed decisions regarding Repair vs. Capital items. A ReCap℠ study performed by Bedford will provide you with the appropriate level of detail regardless of whether you choose to take advantage of the regulations as they stand now, or when they are released next year.
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