The new IRS repair regulations

The potential impact of new “Repair Regulations” for businesses

Elizabeth Rosen
by Elizabeth Rosen, Contributor

The IRS recently released its “Repair Regulations” and it looks like many tax executives are unsure what effects these new rules might have on their business.

According to the results of a 2012 survey conducted by audit and tax firm, KPMG, most tax executives expect the new rules will be more difficult to administer or comply with in practice. The survey asked 1,900 tax executives about their views on the December 2011 release of temporary and proposed regulations (known as the “Repair Regs”) by the U.S. Department of Treasury. The Repair Regs outline significant changes to rules regarding capitalization of costs incurred to acquire, maintain, or improve tangible property.

The survey findings indicated that 62% of respondents were unsure about whether to view the new rules as favorable or unfavorable, while 23% said they were favorable, and 15% said unfavorable. However, while 42% of the executives said they expect the new rules to be more difficult to administer or comply with in practice, and only 10% said they would be less difficult to administer or apply, 27% said they expected nothing to change, and 22% said they were unsure of the impact the new regulations would have on their processes.

“The Repair Regs affect most industries and corporate taxpayers — from store remodeling in the retail industry, to the repair of engines in a trucking fleet, to a new roof on a manufacturing facility,” said Eric Lucas who is a principal at KPMG.

Lucas recommended that tax executives consider conducting an asset repair study or closely review historical and current year asset records, as well as capital improvement projects, to help determine the impact that the new Repair Regs will have on their businesses. Nearly half (49%) of the survey respondents said their company had never conducted an asset repair study, while 28% said their company had conducted a study, and 23% said they were unsure.
  
Another significant change in the new regulations involves the de minimis expensing rule, which allows a taxpayer to deduct the acquisition cost of property (for tax purposes) up to a specified amount, provided it was first tabulated as an expense for financial reporting purposes, and the taxpayer had a written policy in place to account for the acquisition in this manner. Of those surveyed, 43% believed the “de minimis” rule provides sufficient flexibility for taxpayers to account for smaller items of property (such as materials and supplies under the new Repair Regs), but 25% view the overall cap or ceiling as not sufficient to account for smaller items, while 32% are unsure.