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New Final “Repair” Regulations on Tangible Property Costs and Capitalization

Last month, the IRS issued long-awaited comprehensive final regulations on the treatment of payments to acquire, produce, or improve tangible property, otherwise known as the “repair” regulations (T.D. 9636). Taxpayers will use the regulations to determine whether they can deduct their costs as repairs under Code Sec. 162(a) or must capitalize the costs and recover them over a period of years under Code Sec. 263(a).

The final regulations are broad and far-reaching, affecting practically every business, regardless of size, industry, or location. The regulations will have particular impact on capital-intensive industries like utilities, real estate, telecom, and retail.

The preamble to the final regulations estimates that approximately 4 million taxpayers will be impacted by the new regulations, and that a combined 1.1 million hours of their time will be needed to address the new rules.

The basic structure and requirements within the temporary repair regulations issued in 2011 remain intact, but the final regulations make significant taxpayer-friendly changes to them.

Although the final regulations have been “simplified” in several key areas, they remain complex overall. Accordingly, compliance with their labyrinth of rules will challenge virtually every business, especially in light of an approaching January 1, 2014, effective date.

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January 8, 2016

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