On March 7, 2012, the Internal Revenue Service (IRS) released two Revenue Procedures 2012-19 and 2012-20 as guidance for taxpayers to make changes to accounting methods in regards to the temporary regulations, "Repair Regulations," which were released on December 23 of 2011. These two revenue procedures are effective for taxable years beginning on or after January 1, 2012 and can be used to retroactively claim any missed deductions before January 1, 2012. » Read More on Temp Regs 263(a)

This procedure provides instruction for taxpayers to comply with the temporary regulations. For owners of real estate, the changes of interest include:

  • Deducting repair and maintenance costs
  • Deducting certain costs for investigating the acquisition of real estate
    (includes overhead and salaries)
  • Capitalizing acquisition or production costs
  • Capitalizing improvements to tangible property

Rev Proc 2012-19 modifies Rev Proc 2011-14 by adding new automatic method changes as provided in the Repair Regulations. » Full Version - IRS Revenue Procedures 2012-19 (pdf)

For real estate owners, the changes of interest in this revenue procedure apply to taxpayers who want to adjust a method to comply with the new rules concerning:

  • Dispositions of MACRS property
  • Depreciation of Leasehold Improvements
    (you cannot amortize over the life of the lease)
  • General asset accounts
  • Changes in tax life for property depreciated under MACRS


Rev Proc 2012-20 also modifies adds new automatic changes to Rev Proc 2011-14. » Full Version - IRS Revenue Procedures 2012-20 (pdf)

Taxpayers that have conducted "repair studies" by relying on the 2008 proposed regulations will likely have to give back the benefit received from that study if the items in question do not comply with the new Repair Regulations issued on December 23, 2011. The only good news for those taxpayers is that the IRS is offering audit protection to anyone that voluntarily makes the appropriate changes.

Rev. Proc. 2012-20 now clarifies that you can go back as far as you want to claim deductions for retired structural components. This might be the area that provides the most significant opportunity to claim missed deductions. In the past, when a taxpayer renovated an existing building, the IRS' position was that you could not write off the remaining basis of the structural components. This might include things like an old roof, HVAC units that were replaced, old lighting and so forth. For example, anyone that replaced a roof during a renovation is likely depreciating the new roof and the old roof. CPAs and taxpayers should review their depreciation schedules for this kind of opportunity. » Read KBKG's case study on the retirement of structural components

These new Revenue Procedures also simplify the process by allowing for two or more concurrent changes of accounting to be filed on one single Form 3115. Additionally, both Rev. Proc's allow for the use of Statistical Sampling for certain changes as long as the Sampling plan follows the guidelines provided in Rev. Proc. 2011-42.