The Capitalization Versus Deduction Rules Simplified

Acquisition or Production of Tangible Property and Subsequent Expenditures

Coleen S. Troutman, PhD, CPA, and Mollie T. Adams, PhD, CPA

New temporary regulations under Internal Revenue Code (IRC) sections 162(a) and 263(a), Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property, provide taxpayers with extensive guidance on the deduction and capitalization rules for expenditures related to the acquisition, production, or improvement of tangible property (TD 9564, Dec. 31, 2011, http://www.irs.gov/irb/2012-14_IRB/ar05.html). The temporary regulations were originally effective for years beginning on or after January 1, 2012; however, in Notice 2012-73, the IRS delayed the effective date to January 1, 2014, with the option to apply the temporary regulations for tax years beginning on or after January 1, 2012. The temporary regulations will affect all taxpayers that acquire, produce, or improve tangible property, including property used outside the United States. Changes made to comply with the new requirements must be treated as a change in accounting method. (See Revenue Procedure 2012-10 and Revenue Procedure 2012-20 for instructions on obtaining an automatic change in accounting method.)