Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property; Correction, 42189-42193 [2014-17080]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 139 (Monday, July 21, 2014)]
[Rules and Regulations]
[Pages 42189-42193]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17080]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9636]
RIN 1545-BE18


Guidance Regarding Deduction and Capitalization of Expenditures 
Related to Tangible Property; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

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SUMMARY: This document contains amendments to correct the final 
regulations (TD 9636) that provided guidance on the application of 
sections 162(a) and 263(a) of the Internal Revenue Code (Code) 
regarding the deduction and capitalization of expenditures related to 
tangible property. These regulations were published in the Federal 
Register on Thursday, September 19, 2013 (78 FR 57686).

DATES: This correction is effective on July 21, 2014, and is applicable 
beginning September 19, 2013.

FOR FURTHER INFORMATION CONTACT: Merrill D. Feldstein at (202) 317-5100 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    The final regulations (TD 9636) that are the subject of this 
correction provide guidance under sections 162(a) and 263(a) of the 
Code to amounts paid to acquire, produce, or improve tangible property 
and affect taxpayers that acquire, produce, or improve tangible 
property.
    In addition to correcting a number of typographical and syntactical 
errors, these correcting amendments clarify the manner of electing to 
capitalize and depreciate the cost of any rotable spare part, temporary 
spare part, or standby emergency spare part under Sec.  1.162-3(d). As 
published, Sec.  1.162-3(d)(3) of

[[Page 42190]]

the final regulations could be misleading regarding the manner of 
making this election. The election is made by capitalizing the amounts 
paid to acquire or produce a material or supply and by beginning to 
depreciate the designated amounts under the rules for accounting for 
property depreciated under the Modified Accelerated Cost Recovery 
System (MACRS) under section 168 (MACRS property). The final 
regulations are corrected to clarify this point.
    A similar election to capitalize and depreciate the cost of 
materials and supplies was provided under Sec.  1.162-3T(d) of the 
temporary regulations published in the Federal Register on Tuesday, 
December 27, 2011 (TD 9564) (76 FR 81060). While the temporary 
regulations (TD 9564) were removed from the Federal Register on 
September 19, 2013, in conjunction with publication of the final 
regulations (TD 9636), the final regulations permit taxpayers to choose 
to apply Sec.  1.162-3T(d) to amounts paid or incurred (to acquire or 
produce property) in taxable years beginning on or after January 1, 
2012, and before January 1, 2014. The language in Sec.  1.162-3T(d)(3) 
describing the manner of electing to capitalize and depreciate the cost 
of materials and supplies is similar to the language in Sec.  1.162-
3(d)(3) of the final regulations and could be similarly misleading. 
However, because the temporary regulations have been withdrawn, the 
language in Sec.  1.162-3T(d)(3) cannot be corrected. Therefore, for 
good cause to prevent any confusion for taxpayers who choose to apply 
Sec.  1.162-3T(d) as contained in TD 9564 (76 FR 81060) December 27, 
2011, to amounts paid or incurred (to acquire or produce property) in 
taxable years beginning on or after January 1, 2012, and before January 
1, 2014, Sec.  1.162-3(j)(3) is clarified to provide that the manner 
for making the election under Sec.  1.162-3T(d)(3) is the same as the 
manner for making the election under Sec.  1.162-3(d)(3). In both 
cases, the election is made by capitalizing the amounts paid to acquire 
or produce designated materials or supplies and by beginning to 
depreciate these amounts under the rules for accounting for MACRS 
property.

Need for Correction

    As published, the final regulations contain errors that may prove 
to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

    Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


    Par. 2. Section 1.162-3 is amended by:

0
1. Revising the last sentence of paragraph (c)(4)(i).
0
2. Revising the first sentence of paragraphs (c)(4)(ii), (d)(1), and 
(d)(2).
0
3. Revising paragraph (d)(3).
0
4. Revising the fourth sentence of paragraph (e)(1).
0
5. In paragraph (j)(3) removing the text ``section'' wherever it 
appears and adding ``Sec.  '' in its place, and adding two new 
sentences after the first sentence of the paragraph.
    The revisions and addition read as follows:


Sec.  1.162-3  Materials and supplies.

* * * * *
    (c) * * *
    (4) * * *
    (i) * * * The factors that must be considered in determining this 
period are provided under Sec.  1.167(a)-1(b).
    (ii) * * * For taxpayers with an applicable financial statement (as 
defined in paragraph (c)(4)(iii) of this section), the economic useful 
life of a unit of property, solely for the purposes of applying the 
provisions of this paragraph (c), is the useful life initially used by 
the taxpayer for purposes of determining depreciation in its applicable 
financial statement, regardless of any salvage value of the property. * 
* *
* * * * *
    (d) * * *
    (1) * * * A taxpayer may elect to treat as a capital expenditure 
and to treat as an asset subject to the allowance for depreciation the 
cost of any rotable spare part, temporary spare part, or standby 
emergency spare part as defined in paragraph (c)(2) or (c)(3) of this 
section. * * *
    (2) * * * A taxpayer may not elect to capitalize and depreciate 
under this paragraph (d) any amount paid to acquire or produce a 
rotable, temporary, or standby emergency spare part defined in 
paragraph (c)(2) or (c)(3) of this section if--
* * * * *
    (3) Manner of electing. A taxpayer makes the election under this 
paragraph (d) by capitalizing the amounts paid to acquire or produce a 
rotable, temporary, or standby emergency spare part in the taxable year 
the amounts are paid and by beginning to depreciate the costs when the 
asset is placed in service by the taxpayer for purposes of determining 
depreciation under the applicable provisions of the Internal Revenue 
Code and the Treasury Regulations. Section 1.263(a)-2 provides for the 
treatment of amounts paid to acquire or produce real or personal 
tangible property. A taxpayer must make the election under this 
paragraph (d) in its timely filed original Federal tax return 
(including extensions) for the taxable year the asset is placed in 
service by the taxpayer for purposes of determining depreciation. 
Sections 301.9100-1 through 301.9100-3 of this chapter provide the 
rules governing extensions of the time to make regulatory elections. In 
the case of an S corporation or a partnership, the election is made by 
the S corporation or partnership, and not by the shareholders or 
partners. A taxpayer may make an election for each rotable, temporary, 
or standby emergency spare part that qualifies for the election under 
this paragraph (d). This election does not apply to an asset or a 
portion thereof placed in service and disposed of in the same taxable 
year. A taxpayer may revoke an election made under this paragraph (d) 
or made under Sec.  1.162-3T(d), as contained in 26 CFR part 1, revised 
as of April 1, 2013, only by filing a request for a private letter 
ruling and obtaining the Commissioner's consent to revoke the election. 
The Commissioner may grant a request to revoke this election if the 
taxpayer acted reasonably and in good faith and the revocation will not 
prejudice the interests of the Government. See generally Sec.  
301.9100-3 of this chapter. The manner of electing and revoking the 
election to capitalize under this paragraph (d) or under Sec.  1.162-
3T(d), as contained in 26 CFR part 1, revised as of April 1, 2013, may 
be modified through guidance of general applicability (see Sec. Sec.  
601.601(d)(2) and 601.602 of this chapter). An election may not be made 
or revoked through the filing of an application for change in 
accounting method or, before obtaining the Commissioner's consent to 
make the late election or to revoke the election, by filing an amended 
Federal tax return.
    (e) * * *
    (1) * * * If a taxpayer uses the optional method for rotable parts 
for pools of rotable and temporary spare parts for which the taxpayer 
does not use the optional method for its books and records, then the 
taxpayer must use the optional method for all its pools in

[[Page 42191]]

the same trade or business, whether rotable or temporary. * * *
* * * * *
    (j) * * *
    (3) * * * In applying Sec.  1.162-3T(d)(3), as contained in 26 CFR 
part 1, revised as of April 1, 2013, a taxpayer makes the election 
under Sec.  1.162-3T(d) by capitalizing the amounts paid to acquire or 
produce a material or supply in the taxable year the amounts are paid 
and by beginning to depreciate the costs when the asset is placed in 
service by the taxpayer for purposes of determining depreciation under 
the applicable provisions of the Internal Revenue Code and the Treasury 
Regulations. The election under Sec.  1.162-3T(d), as contained in 26 
CFR part 1, revised as of April 1, 2013, does not apply to an asset or 
a portion thereof placed in service and disposed of in the same taxable 
year. * * *

0
Par. 3. Section 1.162-4 is amended by revising the last sentence of 
paragraph (a) to read as follows:


Sec.  1.162-4  Repairs.

    (a) * * * Optionally, Sec.  1.263(a)-3(n) provides an election to 
capitalize amounts paid for repair and maintenance consistent with the 
taxpayer's books and records.
* * * * *

0
Par. 4. Section 1.263(a)-0 is amended by revising the entry in the 
outline of the regulations for Sec.  1.263(a)-2(f)(3)(ii) to read as 
follows:


Sec.  1.263(a)-0  Outline of regulations under section 263(a).

* * * * *


Sec.  1.263(a)-2  Amounts paid to acquire or produce tangible property.

* * * * *
    (f) * * *
    (3) * * *
    (ii) Treatment of inherently facilitative amounts allocable to 
property not acquired.
* * * * *

0
Par. 5. Section 1.263(a)-1 is amended by:
0
1. Revising the second sentence of paragraph (f)(1).
0
2. Revising paragraphs (f)(1)(i)(B)(2), (f)(1)(ii)(B)(2), (f)(3)(iv), 
and (f)(3)(vii).
0
3. Revising the third sentence of paragraph (f)(5).
0
4. Revising the heading of paragraph (f)(7) Example 6.
    The revisions read as follows:


Sec.  1.263(a)-1  Capital expenditures; in general.

* * * * *
    (f) * * *
    (1) * * * However, section 263A and the regulations under section 
263A require taxpayers to capitalize the direct and allocable indirect 
costs of property produced by the taxpayer (for example, property 
improved by the taxpayer) and property acquired for resale.
    (i) * * *
    (B) * * *
    (2) Amounts paid for property with an economic useful life (as 
defined in Sec.  1.162-3(c)(4)) of 12 months or less;
* * * * *
    (ii) * * *
    (B) * * *
    (2) Amounts paid for property with an economic useful life (as 
defined in Sec.  1.162-3(c)(4)) of 12 months or less;
* * * * *
    (3) * * *
    (iv) Treatment of de minimis amounts. An amount paid for property 
to which a taxpayer properly applies the de minimis safe harbor 
contained in this paragraph (f) is not treated as a capital expenditure 
under Sec.  1.263(a)-2(d)(1) or Sec.  1.263(a)-3(d) or as a material 
and supply under Sec.  1.162-3, and may be deducted under Sec.  1.162-1 
in the taxable year the amount is paid provided the amount otherwise 
constitutes an ordinary and necessary expense incurred in carrying on a 
trade or business.
* * * * *
    (vii) Combined expensing accounting procedures. For purposes of 
paragraphs (f)(1)(i) and (f)(1)(ii) of this section, if the taxpayer 
has, at the beginning of the taxable year, accounting procedures 
treating as an expense for non-tax purposes amounts paid for property 
costing less than a specified dollar amount and amounts paid for 
property with an economic useful life (as defined in Sec.  1.162-
3(c)(4)) of 12 months or less, then a taxpayer electing to apply the de 
minimis safe harbor under this paragraph (f) must apply the provisions 
of this paragraph (f) to amounts qualifying under either accounting 
procedure.
* * * * *
    (5) * * * Sections 301.9100-1 through 301.9100-3 of this chapter 
provide the rules governing extensions of the time to make regulatory 
elections.* * *
* * * * *
    (7) * * *

    Example 6. De minimis safe harbor; non-invoice additional costs. 
* * *
* * * * *

0
Par. 6. Section 1.263(a)-2 is amended by:
0
1. Revising the second sentence of paragraph (d)(1).
0
2. Revising the second sentence of paragraph (f)(2)(iv)(A) and the 
fifth sentence of paragraph (f)(2)(iv)(B).
0
3. Revising the heading of paragraph (f)(3)(ii).
0
4. Removing the text ``section'' in the last sentence of paragraph 
(h)(2).
    The revisions read as follows:


Sec.  1.263(a)-2  Amounts paid to acquire or produce tangible property.

* * * * *
    (d) * * *
    (1) * * * Section 1.263(a)-3(f) provides the rules for determining 
whether amounts are for leasehold improvements.* * *
* * * * *
    (f) * * *
    (2) * * *
    (iv) * * *
    (A) * * * However, section 263A provides rules for employee 
compensation and overhead costs required to be capitalized to property 
produced by the taxpayer or to property acquired for resale.
    (B) * * ** Sections 301.9100-1 through 301.9100-3 of this chapter 
provide the rules governing extensions of the time to make regulatory 
elections. * * *
* * * * *
    (3) * * *
    (ii) Treatment of inherently facilitative amounts allocable to 
property not acquired. * * *
* * * * *

0
Par. 7. Section 1.263(a)-3 is amended by:
0
1. Revising the second and third sentences of paragraph (d) and adding 
a new fourth sentence.
0
2. Revising the second sentence of paragraph (e)(2)(i).
0
3. Revising first and third sentences of paragraph (f)(2)(i).
0
4. Revising the first, second, and last sentences of paragraph 
(f)(3)(i).
0
5. Removing the eighth sentence of paragraph (g)(2)(ii) Example 3.
0
6. Revising paragraph (h)(4).
0
7. Revising the last sentence of paragraph (h)(5)(ii).
0
8. Revising the second sentence of paragraph (h)(6).
0
9. Revising the first sentence and removing the second sentence of 
paragraph (i)(6) Example 3(ii).
0
10. Revising the next to the last sentence of paragraph (j)(3) Example 
11 and removing the last sentence of this paragraph.
0
11. Revising paragraphs (k)(1)(v) and (k)(1)(vi).
0
12. Revising the first sentence of paragraph (k)(2).
0
13. Revising the last sentence of paragraph (k)(7) Example 7.

[[Page 42192]]

0
14. Removing the sixth sentence of paragraph (k)(7) Example 30.
0
15. Revising the second sentence of paragraph (n)(2).
    The revisions and addition read as follows:


Sec.  1.263(a)-3  Amounts paid to improve tangible property.

* * * * *
    (d) * * * However, paragraph (f) of this section applies to the 
treatment of amounts paid to improve leased property. Section 263A 
provides the requirement to capitalize the direct and allocable 
indirect costs of property produced by the taxpayer and property 
acquired for resale. Section 1016 provides for the addition of 
capitalized amounts to the basis of the property, and section 168 
governs the treatment of additions or improvements for depreciation 
purposes. * * *
* * * * *
    (e) * * *
    (2) * * *
    (i) * * * Paragraph (e)(2)(iii) of this section provides the unit 
of property for condominiums, paragraph (e)(2)(iv) of this section 
provides the unit of property for cooperatives, and paragraph (e)(2)(v) 
of this section provides the unit of property for leased buildings.
* * * * *
    (f) * * *
    (2) * * *
    (i) * * * A taxpayer lessee must capitalize the related amounts, as 
determined under paragraph (g)(3) of this section, that it pays to 
improve, as defined under paragraph (d) of this section, a leased 
property except to the extent that section 110 applies to a 
construction allowance received by the lessee for the purpose of such 
improvement or when the improvement constitutes a substitute for rent. 
* * * A taxpayer lessee must also capitalize the related amounts that a 
lessor pays to improve, as defined under paragraph (d) of this section, 
a leased property if the lessee is the owner of the improvement, except 
to the extent that section 110 applies to a construction allowance 
received by the lessee for the purpose of such improvement. * * *
* * * * *
    (3) * * *
    (i) * * * A taxpayer lessor must capitalize the related amounts, as 
determined under paragraph (g)(3) of this section, that it pays 
directly, or indirectly through a construction allowance to the lessee, 
to improve, as defined in paragraph (d) of this section, a leased 
property when the lessor is the owner of the improvement or to the 
extent that section 110 applies to the construction allowance. A lessor 
must also capitalize the related amounts that the lessee pays to 
improve a leased property, as defined in paragraph (e) of this section, 
when the lessee's improvement constitutes a substitute for rent. * * * 
See paragraph (e)(2) of this section for the unit of property for a 
building and paragraph (e)(3) of this section for the unit of property 
for real or personal property other than a building.
* * * * *
    (h) * * *
    (4) Eligible building property. For purposes of this section, the 
term eligible building property refers to each unit of property defined 
in paragraph (e)(2)(i) (building), paragraph (e)(2)(iii)(A) 
(condominium), paragraph (e)(2)(iv)(A) (cooperative), or paragraph 
(e)(2)(v)(A) (leased building or portion of building) of this section, 
as applicable, that has an unadjusted basis of $1,000,000 or less.
    (5) * * *
    (ii) * * * Section 1.263(a)-4(f)(5)(ii) provides the factors that 
are significant in determining whether there exists a reasonable 
expectancy of renewal for purposes of this paragraph.
    (6) * * * Sections 301.9100-1 through 301.9100-3 of this chapter 
provide the rules governing extensions of the time to make regulatory 
elections. * * *
* * * * *
    (i) * * *
    (6) * * *

    Example 3. * * *
    (ii) The additional aircraft engines are rotable spare parts 
under Sec.  1.162-3(c)(2) because they were acquired separately from 
the aircraft, are removable from the aircraft, and are repaired and 
reinstalled on other aircraft or stored for later installation. * * 
*
* * * * *
    (j) * * *
    (3) * * *

    Example 11.  * * * Under paragraph (g)(4) of this section, City 
C's new requirement that K's building meet certain safety standards 
to continue to operate is not relevant in determining whether the 
amount paid improved the building.
* * * * *
    (k) * * *
    (1) * * *
    (v) Results in the rebuilding of the unit of property to a like-new 
condition as determined under paragraph (k)(5) of this section after 
the end of its class life as defined in paragraph (i)(4) of this 
section; or
    (vi) Is for the replacement of a part or combination of parts that 
comprise a major component or a substantial structural part of a unit 
of property as determined under paragraph (k)(6) of this section.
    (2) * * * An amount is paid to improve a building if it is paid to 
restore, as defined under paragraph (k)(1) of this section, a property 
specified under paragraph (e)(2)(ii) (building), paragraph 
(e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or 
paragraph (e)(2)(v)(B) (leased building or portion of building) of this 
section. * * *
* * * * *
    (7) * * *

    Example 7. * * * However, paragraphs (k)(1)(vi) and (k)(6) of 
this section are applicable for determining whether any amounts must 
be capitalized because they are paid for the replacement of a major 
component or a substantial structural part of the unit of property.
* * * * *
    (n) * * *
    (2) * * * Sections 301.9100-1 through 301.9100-3 of this chapter 
provide the rules governing extensions of the time to make regulatory 
elections. * * *

0
Par. 8. Section 1.263A-1 is amended by revising paragraph (l) to read 
as follows:


Sec.  1.263A-1  Uniform capitalization of costs.

* * * * *
    (l) Effective/applicability date--(1) In general. Except as 
provided in (l)(2), (l)(3), and (l)(4) of this section, the effective 
dates for this section are provided in paragraph (a)(2) of this 
section.
    (2) Mixed service costs; self-constructed tangible personal 
property produced on a routine and repetitive basis. Paragraphs 
(h)(2)(i)(D), (k), and (l)(2) of this section apply for taxable years 
ending on or after August 2, 2005.
    (3) Costs allocable to property sold; indirect costs; licensing and 
franchise costs. Paragraphs (c)(5), (e)(3)(i), and (e)(3)(ii)(U) of 
this section apply for taxable years ending on or after January 13, 
2014.
    (4) Materials and supplies--(i) In general. The last sentence of 
paragraphs (e)(2)(i)(A) and (e)(3)(ii)(E) of this section, and 
paragraph (l)(4) of this section apply to amounts paid (to acquire or 
produce property) in taxable years beginning on or after January 1, 
2014.
    (ii) Early application of this section. A taxpayer may choose to 
apply the last sentence of paragraphs (e)(2)(i)(A) and (e)(3)(ii)(E) of 
this section, and paragraph (l)(4) of this section to amounts paid (to 
acquire or produce property) in taxable years beginning on or after 
January 1, 2012.

[[Page 42193]]

    (iii) Optional application of TD 9564. A taxpayer may choose to 
apply Sec.  1.263A-1T(b)(14), the introductory phrase of Sec.  1.263A-
1T(c)(4), the last sentence of Sec.  1.263A-1T(e)(2)(i)(A), the last 
sentence of Sec.  1.263A-1T(e)(3)(ii)(E), Sec.  1.263A-1T(l), and Sec.  
1.263A-1T(m)(2), as these provisions are contained in TD 9564 (76 FR 
81060) December 27, 2011, to amounts paid (to acquire or produce 
property) in taxable years beginning on or after January 1, 2012, and 
before January 1, 2014.

Martin V. Franks,
Branch Chief, Publications and Regulations Branch, Legal Processing 
Division, Associate Chief Counsel (Procedure and Administration).
[FR Doc. 2014-17080 Filed 7-18-14; 8:45 am]
BILLING CODE 4830-01-P