OUR THOUGHTS ON:

IRS Conducts Hearing on New "Repair" Regulations

Tax

By Ron Kramer

On May 9, the IRS held a hearing on the new temporary and proposed "repair" regulations it issued on December 28, 2011. Several prominent speakers at the hearing criticized the IRS’s proposals as being too impractical and burdensome for both large and small businesses. 

Under Internal Revenue Code (IRC) Sec. 263(a), taxpayers are generally required to capitalize amounts paid to acquire, produce or improve tangible property. The new temporary and proposed regulations were designed to address when taxpayers can deduct payments as repairs or whether they must capitalize them. The IRS hoped the new regulations would clarify and expand the existing standards for capitalizing expenses associated with tangible property and provide some bright-line tests for applying the standards. However, several of the speakers at the hearing testified that the rules are too complex for large businesses as well as small business and that the 2012 effective date of complying with the temporary regulations imposes an enormous burden on small business. 

One of the new standards criticized by the speakers was the "de minimis" rule. Under the new "de minimis" rule, taxpayers can deduct amounts paid for acquiring or producing property if the taxpayer has an applicable financial statement (an AFS is generally an audited financial statement); had written accounting procedures at the beginning of the year for writing off property costing less than a certain dollar amount; and treated the amount as an expense on its AFS, in accordance with its accounting procedures. Under the new regulations, the IRS provides that the total amount deducted under the de minimis rule must not exceed the greater of a percentage of gross receipts for the year or a percentage of total depreciation expenses for the year. The IRS believes the use of such a ceiling provides "an objective and administrable limit" on the deduction. 

The speakers noted that the de minimis rule’s AFS requirement won’t be met by most small businesses since they have no need for an AFS. Thus, a deduction under the de minimis rule is not available to small businesses. Instead, one speaker suggested it might be better for the regulations to provide a broader write-off for taxpayers whose gross receipts averaged $10 million or less over three years. 

One speaker testifying on behalf of the American Institute of Certified Public Accountants (AICPA) told the IRS that the regulations proposed by the IRS “fail to provide sufficiently objective principles, they do not provide as many bright line tests as are needed and they introduce entirely new sources of complexity.” The speaker also said the AICPA believes the de minimis rule in the regulations, which requires an Applicable Financial Statement (AFS), discriminates against smaller taxpayers. 

The IRS had hoped that the new 2011 regulations would overcome much of the comments and objections they received to previously issued and withdrawn 2006 and 2008 proposed regulations. Will the hearing’s criticism of the new regulations as being too impractical and burdensome lead to another redo by the IRS? 

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