IRS Issues Guidance on Capitalization vs. Repair Expense Including Automatic Accounting Method Changes

The IRS released two revenue procedures that describe how taxpayers can obtain automatic consent to change their accounting methods to comply with the recent temporary tangible property capitalization vs. repair regulations.  Revenue Procedure 2012-19 details repair and maintenance, materials and supplies, and related method changes resulting from the temporary regulations.  Revenue Procedure 2012-20 addresses depreciation, disposition, and related method changes resulting from the temporary regulations.  The two revenue procedures add a total of 19 new automatic changes to Revenue Procedure 2011-14, the existing automatic method change revenue procedure.  In addition, the IRS issued a memorandum to its field exam  offices addressing taxpayers who adopted a method of accounting relating to the conversion of capitalized assets to a repair expense.

            Most of the automatic method changes under the temporary regulations, and particularly those in the repair area, are made with a Code Section 481(a) adjustment.  Taxpayers may use the statistical sampling procedures outlined in Revenue Procedure 2011-42 for the adjustment.  Taxpayers record their method changes by filing IRS Form 3115 with their tax returns.

The new revenue procedures also give taxpayers a two-year window to comply with the method change rules.  The otherwise-applicable scope limitations would have required some taxpayers, including taxpayers under exam, to get explicit IRS consent before a method change could be made.