Written by: Gene G. Smith, CPA

In late 2011, the IRS released lengthy and complex temporary regulations on the subject of when certain property costs must be capitalized and depreciated for federal income tax purposes-as opposed to being deducted currently.

The temporary regulations are expected to be effective for tax years beginning on or after 1/1/14, but taxpayers can choose to apply them for tax years beginning on or after 1/1/12. The good news is the temporary regulations provide some opportunities for taxpayers to deduct, rather than capitalize, certain costs. The bad news is the temporary regulations will require many taxpayers to change their methods of accounting for tangible property costs.

If a taxpayer does change their method of accounting, IRS Form 3115 will have to be filed for each type of accounting change (The IRS has identified several categories of accounting changes). It is possible that a single reporting entity would have to file multiple 3115’s if they have multiple types of changes.

If a taxpayer does have accounting changes, those may result in Section 481(a) adjustments, and those adjustments may be positive (resulting in higher taxable income) or negative (resulting in lower taxable income).

Because of the complexity of the temporary regulations, the taxpayer needs to consult with a professional to see how these new regulations will impact their business. The time to analyze assets currently on the books and determine if accounting changes are required is now.