Sparring with the IRS: The New (Final?) Repair Regulation Rules Wichita State University Accounting & Auditing Conference May 19, 2014 Curtis Dean, CPA, MST, CGMA, CFP® Vice President, Tax Research & Special Projects Allen, Gibbs & Houlik, L.C. 1

SPAR – Select Property Acquisitions or Repairs IRSCPA 2

Acquisition/production of tangible property Capitalize to basis of acquired/produced tangible property: Amount paid to acquire/produce Costs to defend or perfect title Inherently facilitative costs Exceptions: De minimis rule Materials and supplies deductible under Reg. section T, unless elect to capitalize

Repairs Units of Property (UOP) Buildings Componentization Structural Part 4

Componentization 1.What is componentization? 2.Did it exist before? 3.If so, when did it leave? 4.Is it back? 5

Repairs Units of Property (UOP) Personal Property Functional interdependence standard Plant property – discrete and major function 6

B. A. R. rules 7

B. A. R. Improvement Standards Improvement (means capitalize) BettermentAdaptationRestoration 8 or

Betterment = capitalize Material addition (e.g., physical enlargement, expansion or extension) to UOP Correction of material defect that existed prior to acquisition of UOP or arose during production of UOP Material increase in strength, capacity, productivity, efficiency, quality or output of UOP 9

Adaptation = capitalize Modification of UOP inconsistent with intended ordinary use of UOP when placed in service Adapts UOP to new or different use 10

Restoration = capitalize 1. Replaces component deducted as loss2. Replaces component and basis adjusted for sale or exchange3. Repairs component after casualty if basis adjusted 11

Restoration = capitalize 4. Returns UOP to operating condition if in state of nonfunctional disrepair 5. Rebuilds UOP to like-new condition after end of class life6. Replaces major component or substantial structural part of UOP 12

Automatic Accounting Method Changes Each of these on separate Forms 3115 #7 – Impermissible to permissible depreciation #21 – Removal costs #196 – Late partial disposition election 13

Automatic Accounting Method Changes All of these on one Form 3115 #184 to #193 covering:  Units of Property  Materials and supplies  Repairs and maintenance  Transaction costs  Etc. 14

Key Annual Elections Statements required: De minimis rule safe harbor Capitalize all repair and maintenance costs Small Taxpayer Safe Harbor 15

Key Annual Elections No Statements required: Capitalize and depreciate rotable spare parts Partial Disposition Election 16

Dealing with the IRS Circular 230 Signing returns Penalty assessment 17

Circular 230 Disclaimer Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein. These materials should not be used as a substitute for consultation with competent professional advisors. Before making any decision or taking any action, you should obtain appropriate professional guidance.

Winners by Split Decision Questions? 19