OVERVIEW • Notice 2012-73 delays effective date of Temporary Regulations effective for taxable years beginning on of after Jan. 1, 2014 • IRS will modify portions of Temp Regs related to De Mininis amounts, Dispositions, and Routine Maintenance Safe Harbor in 2013 • Rev Proc 2012-19 (M&S, Capital Expenditures, Transaction Costs, and Improvements) and 2012-20 (Leased Property, GAA, MACRS Property, Dispositions of MACRS Property) provide guidance including Sec 481(a) method changes • Rev Proc 2012-20 permits late-GAA election for property placed in service prior to 2012 by filing Form 3115 within first two tax years beginning on or after Jan. 1, 2012 and Taxpayers should consider to timely elect GAA treatment for assets placed in service in 2012 on Form 4562 to take advantage of favorable disposition rules, especially for real property

1. Temporary
Repairs
Regulations
Bob Montes, ASA
Principal, Tangible Asset Valuation
Datawise Design, Inc.
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2. 2013 Datawise Design, Inc. – Temporary Repairs Regulations (Section 263(a))
Notice: This document was not intended or wriFen to be used, and it cannot be used, for
the purpose of avoiding U.S. federal, state or local tax penalties.
Overview Contents
• Notice 2012-73 delays effective date of
Temporary Regulations effective for taxable
years beginning on of after Jan. 1, 2014
• IRS will modify portions of Temp Regs related
to De Mininis amounts, Dispositions, and
Routine Maintenance Safe Harbor in 2013
• Rev Proc 2012-19 (M&S, Capital
Expenditures, Transaction Costs, and
Improvements) and 2012-20 (Leased
Property, GAA, MACRS Property,
Dispositions of MACRS Property) provide
guidance including Sec 481(a) method
changes
• Rev Proc 2012-20 permits late-GAA election
for property placed in service prior to 2012
by filing Form 3115 within first two tax years
beginning on or after Jan. 1, 2012 and
Taxpayers should consider to timely elect
GAA treatment for assets placed in service
in 2012 on Form 4562 to take advantage of
favorable disposition rules, especially for
real property
• Material, Supplies, and
Rotable Spare Parts
o Define M&S as Tangible Personal
Property
• De Minimis Rule
o Capitalization Threshold
• Amounts Paid to Improve
Tangible Property
o Routine Maintenance Safe
Harbor
o Define Unit of Property
o Improvement Standards
• Dispositions and General
Asset Account Election
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3. Materials, Supplies and
Rotable Spare Parts
• Materials and Supplies (Temp. Reg. Sec. 1.162-3T)
• Temp Regs follow existing, pre-Jan 1, 2012 law for non-
incidental and incidental M&S
• Non-incidental M&S (deducted in year used or
consumed)
• Incidental M&S (expensed in the year acquired; TP does
not maintain a record of consumption or take physical
inventories at year end)
• Clarify and expand definition of M&S, eliminate the
requirement that such property not be a Unit of Property
(UoP, i.e., can be a larger, separate component),
provide an optional, alternative method of accounting
(election) for rotable and temporary spare parts, and
provide an annual election to treat (each) certain M&S
under the De Minimus Rule, i.e., deduct currently
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4. Materials, Supplies and
Rotable Spare Parts
• Define M&S as tangible personal property (other than
inventory) used or consumed in a TP’s operations that
meets the following criteria:
o A component acquired to maintain, repair, or improve a unit of tangible
property owned, leased, or serviced by the TP and that is not acquired as part
of any single unit of tangible property (includes rotable and temporary spare
parts);
o Fuels, lubricants, water, and similar items reasonably expected to be consumed
in 12 months or less beginning when used in a TP’s operations (new category);
o A UoP that has an economic useful life of 12 months or less;
o A UoP with an acquisition or production cost of $100 or less; or
o Property identified in future published guidance.
• A TP may elect annually to capitalize and depreciate
each M&S. A TP makes such election on a timely filed
original federal income tax return, including extensions,
for the tax year the asset is placed in service
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5. Materials, Supplies and
Rotable Spare Parts
• Rotable and Temporary Spare Parts (Temp. Reg. Sec. 1.162-3T)
• RSP are defined as M&S that are acquired for installation on a
UoP, removable from that UoP, generally repaired or improved,
and either reinstalled on the same or other property or stored
for later installation
• TSP are M&S that are used temporarily until a new or repaired
part can be installed and then are removed and stored for
later (emergency or temporary) installation
• Temp Regs provide 3 methods for treating costs for RSP and
TSP: 1) deduct when used or consumed, (i.e., in the year when
disposed of, default), 2) elect to capitalize and depreciate
over the applicable recovery period, or 3) elect an optional,
alternative method
• The TP must use 1 of the 3 (same) methods for all RSP and TSP
in the same trade or business
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6. Materials, Supplies and
Rotable Spare Parts
• Under the optional method, the TP deducts its basis in
RSP and/or TSP in the year it is placed in service,
recognizes income Fair Market Value (FMV) when the
part is removed, capitalizes costs to fix the part, and
then claims a deduction for such basis when the part is
once again placed in service:
o Deduct the cost to produce or acquire the part when the part is first installed,
o Recognize in gross income the FMV of the part when removed from the UoP,
and include the FMV and cost to remove the part in the basis of the part,
o Add to the basis of the part any amount paid to repair, maintain, or improve
the part,
o Deduct the cost of reinstallation and basis not previously deducted in the tax
year in which the part is reinstalled, and
o Deduct any remaining amount of basis in the part in the tax year in which it is
disposed of.
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7. De Minimis Rule
• De Minimis Rule or “Capitalization Threshold” related to
amounts paid to acquire or produce tangible property
(Temp. Reg. Sec. 1.263(a)-2T(g))
• Temp Regs permit a TP to deduct certain expenditures
that have a useful life greater than 12 months consistent
with their treatment on their Applicable Financial
Statement (AFS) subject to a ceiling
• De Minimis Rule can be applied by a TP who meets all of
the following criteria:
o AFS filed with Securities and Exchange Commission (SEC); or
o Audited financial statement by an independent CPA that is used for creditors
or other non-tax purpose; or
o Financial statement other than a tax return required to be provided to an
agency of the federal or state government other than the IRS or SEC; and
o Written financial accounting policy in place at the beginning of the tax year to
deduct a certain dollar threshold and expense amounts on its AFS (non-tax
purpose) consistent with the written policy.
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8. De Minimis Rule
• The amounts are treated as an expense on the AFS; and
• The ceiling amount (i.e., the maximum deduction under the
De Minimis Rule) is equal to the greater of:
o 0.1% of federal income tax reported gross receipts for the tax year, or
o 2% of the TP’s total book depreciation and amortization expense for the tax
year reported on its AFS.
• Temp Regs De Minimis Rule is available only to TP’s with an
AFS; otherwise, will not qualify for the De Minimis Rule
• The ceiling amount is not meant to be a “hard cap”; meaning
that TP’s seeking a deduction for amounts in excess of the
ceiling amount allowed by the De Minimis Rule may be
mitigated by a written agreement between examiners and TP
if certain amounts in excess are immaterial, provided such
agreements clearly reflect income
• TP may elect to capitalize amounts expensed under its AFS
capitalization threshold to allow it to deduct the ceiling
amount
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9. De Minimis Rule
• De Minimis Rule cannot be used for inventory or for land costs
• Amounts deducted as M&S are not included in the ceiling
computation unless the TP elects by simply deducting the
amounts of any M&S in the tax year in which the amounts are
paid
• TP can elect not to apply the De Mininis Rule to any UoP
acquired during the year simply by capitalizing the amounts
on its timely filed federal income tax return
• Determination of whether the TP has an AFS and a written
policy to expense amounts below a certain threshold can be
made at the consolidated group level
• Determination and application of the ceiling amount is made
separately for each consolidated group member
• Lack of book and tax conformity will cause TPs to track the
total cost of newly acquired assets that have been expensed
during the tax year for financial statement purposes
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10. Amounts Paid to Improve
Tangible Property
• Temp Regs generally provide that amounts paid to
improve a UoP (real or tangible personal) must to
capitalized, if UoP results in:
o A betterment of the UoP;
o A restoration of the UoP; or
o An adaptation of the UoP to a new or different use.
• Under the Routine Maintenance Safe Harbor, recurring
maintenance activities on a UoP (other than a building
or a structural component of a building) expected to
occur more than once during the ADS (Alternative
Depreciation System) class life of the UoP, as a result of
normal wear and tear (use) to “keep” the UoP in its
ordinary efficient operating condition as currently
deductible, i.e., otherwise capitalized as a restoration or
replacement of a major component of a UoP
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11. Amounts Paid to Improve
Tangible Property
• Routine maintenance includes inspecting, cleaning and
testing a UoP and replacing parts with comparable and
reasonable replacement parts
• Factors to be considered in determining whether a TP is
performing routine maintenance are the recurring
nature of the activity, industry practice, manufacturer’s
recommendations, the TP’s experience and treatment of
the activity on its AFS
• An activity is not considered routine and recurring if it
results in a betterment or adaptation, is performed on
property where a TP has taken into account the
adjusted basis on the property, e.g. by claiming a loss, or
if the property is in a state of nonfunctional disrepair prior
to the expenditure
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12. Amounts Paid to Improve
Tangible Property
• Temp Regs define UoP as consisting of all components that
are functionally interdependent, where placing one
component in service is dependent on placing another
component in service
• Special UoP rules are provided for buildings and structural
components, plant property, network assets, and leased
property
• Temp Regs provide that a component must be treated as a
separate UoP, if that component is property treated as being
within a different MACRS class (under IRC Sec 168(e)) than the
class of the larger UoP, or has been properly depreciated
using a different depreciation method (depreciation
consistency rule)
• MACRS consistency rule applies if a TP or IRS changes the
MACRS class or depreciation method for any type of property
during the placed in service year of the asset and in future
years, e.g. if a TP completes a cost segregation study
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13. Amounts Paid to Improve
Tangible Property
• Temp Regs define a building and its structural components as
a single UoP, but require that the improvement standards be
applied separately to the building structure and specifically
defined 8 building systems:
o Building Structure;
o HVAC System;
o Plumbing System;
o Electrical System;
o Conveyance Systems (Escalators, Elevators);
o Fire Protection and Alarm Systems, i.e., Fire, Life & Safety Systems;
o Security Systems;
o Gas Distribution Systems (practically lump-sum with Plumbing System); and
o Other structural components or systems identified in published guidance, e.g. Land
Improvements.
• Under 2008 Regs, a building and and its structural components
were a single UoP for an entire building; which will now likely
result in additional capitalizable improvements on prior-year
repair expenditures and may necessitate a Sec 481(a)
method change
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14. Amounts Paid to Improve
Tangible Property
• Plant property is functionally interdependent machinery or
equipment and is generally comprised of each component or group
of components used to perform an industrial process, e.g.
manufacturing, power generation, warehousing, distribution,
automated materials handling, etc.
• Temp Regs further divide functionally interdependent plant property
into smaller UoPs based on components or groups of components
that perform a discrete and major function or operation
• The discrete and major function standard often results in a smaller
UoP especially with assembly-line or continuous processes; which will
now likely result in a Sec 481(a) method change where prior-year
repair expenditures compared the entire production line as a single
UoP
• Temp Regs provide that the UoP for network assets is determined by
the TP’s particular facts and circumstances or typically in published
guidance, e.g. Rev Proc 2011-27 for wireline network assets, Rev Proc
2011-28 for wireless network assets, and Rev Proc 2011-43 for electric
transmission and distribution property, TBD natural gas, cable TV,
electric generation assets
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15. Amounts Paid to Improve
Tangible Property
• Leased (real or tangible personal) property other than leased
buildings, follow the general rules for property other than buildings
including the functional interdependence test and plant property
rules for discrete and major function except that the UoP may not be
larger than the unit of leased property (property subject to lease)
• UoP for leasehold improvements for a lessor are included within the
same UoP (added to) as the UoP (building and components) being
improved
• UoP for leasehold improvements for a lessee are separate from the
leased portion of each building and its components; however, the
cost of further improving the lessee improvements (2nd generation)
are the same (added to) as the original leasehold improvements
• After determining the correct UoP, the next step is to access whether
the expenditure is an improvement to the UoP requiring
capitalization, i.e., betterment, restoration or adaptation of the UoP
to a new or different use
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16. Amounts Paid to Improve
Tangible Property
• An amount paid results in a betterment of a UoP if it:
o Corrects a material condition or defect that was pre-existing or arose during
the production of the UoP, whether the TP was aware of the condition or
defect at the time of acquisition or production,
o Results in a material addition (including a physical enlargement, expansion, or
extension) to the UoP, or
o Results in a material increase in capacity (volume or area), productivity,
efficiency, strength, quality or output of the UoP.
• The betterment standard is highly factual and requires TP’s to compare
the cost of the repair against the UoP to determine whether an amount
paid results in a betterment to that UoP
• If an event necessitates the expenditure, compare the property
immediately before and after the spend; if normal wear and tear,
compare the property after current spend with property after the most
recent prior spend
• Temp Regs require the TP to take into account the purpose of the
expenditure, the physical nature of the of the worked performed, the
effect of the expenditure on the UOP, and the TP’s treatment of the
expenditure on its AFS 16

17. Amounts Paid to Improve
Tangible Property
• Basis recovery on the disposition of property is a critical component
of the restoration improvement standard; capitalizable restorations
include an otherwise deductible repair when the TP recovers the
adjusted basis on the disposition of a replaced component or part
• Capitalization of amounts paid to restore a UoP include:
o Replacing a component of a UoP if the TP has property deducted a loss for
that component (other than a casualty loss under Reg Sec 1.165-7);
o Replacing a component of a UoP if the TP has properly taken unto account
the adjusted basis of the component in realizing gain or loss from the sale or
exchange of the component;
o Repairing damage to a UoP for which the TP has property taken a basis
adjustment as a result of a casualty loss under Sec 165, or relating to a casualty
event described in Sec 165;
o Returning a property to its ordinarily efficient operating condition from a state
of nonfunctional disrepair;
o Rebuilding the property to a like-new condition after the end of its class life; or
o Replacing a major component or substantial structural part of a UoP, e.g. large
portion of the physical structure and/or performs a discrete and critical
function in operation of UoP.
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18. Amounts Paid to Improve
Tangible Property
• Temp Regs eliminate the 50% bright-line measurement under
2008 Regs that allowed a TP to deduct an expenditure to
restore property if less than 50% of the structure was replaced
or less than 50% of the value of the unit of property was
replaced in favor of a facts and circumstances approach
• TP’s must capitalize amounts paid to adapt a UoP to a new or
different use if the adaptation is not consistent with the TP’s
intended , ordinary use of the UoP at the time originally
placed in service by the TP
• Temp Regs provide that in the case of a building, an amount
paid to adapt the UoP to a new or different use include any of
the properties listed in the Regs, i.e., buildings, condominiums,
cooperatives, or leased buildings
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19. Dispositions and General
Asset Account Election
• Temp Regs provide that the retirement of a structural component
of a building is a disposition of MACRS property; heretofore, there
was only relief for tangible personal property or land
improvements
• The new disposition rules work with the new restoration rules,
where a TP generally recovers the basis of the disposed
component, but must capitalize repair costs
• Temp Regs modified the General Asset Account (GAA) rules
which allows TP’s to group property placed in service the same
year with the same asset life, recovery method, and averaging
convention
• GAA election provides a TP the flexibility to forgo the basis
recovery on the disposition and currently deduct the
replacement costs as a repair
• GAA election is made by checking the box on Form 4562 in the
year the assets are placed in service (line 18 of the 2011 Form
4562); the TP is required to keep records that indicate which
assets are in each GAA
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