The IRS recently released its Audit Techniques Guide related to issue of Capitalization vs. Repairs. This issue has received a significant amount of attention by the IRS over the last couple of years as many taxpayers have filed for Changes in Accounting Method to take advantage of missed deductions. Because the amount of deductions can be significant and because the determination of appropriate treatment involves intense evaluation of facts and circumstances, the IRS raised this to a "Tier 1" audit issue.
The current IRS proposed regulations have broadened and clarified the definition of "repair and maintenance" costs. Application of the existing law requires an in-depth understanding of the various tax cases and "tests" that must be met. Thorough documentation is necessary to sustain audit and must show the application of existing law for each asset reclassified.
Currently, this opportunity relates to all prior, current, and future tax years. However, in order to take advantage of the tax laws for prior years, taxpayers should act quickly as the IRS is considering rules that would limit the opportunity for prior years.
Taxpayers utilizing the book method of accounting - with respect to (Repair and Maintenance) R&M - should consider the potential to accelerate cash flow by 1) changing their method of accounting and 2) engaging in an R&M study. By using the book method, taxpayers miss out on the opportunity to accelerate cash flow through the current-year deduction for R&M expense.
It is important to note that under Rev. Proc. 2009-39, the change in accounting method of reclassifying previously capitalized repair and maintenance expenses as deductions is now considered automatic. In order to implement the automatic method, a section 481(a) adjustment is needed, along with specific representations in an attachment to Form 3115. This change in accounting method can be filed any time before the extended tax return due date in the year of change.
To find out if you might benefit from this opportunity, feel free to contact Gian Pazzia at 626.449.4225 x150
Author: Gian Pazzia, CCSP