Internal Revenue Service Capitalization of Tangible Property Treas. Reg. § 1.263(a) and related regulations Large Business and International 9/14/2016 Table of Contents CHAPTER 1 EXAMINATION OF TANGIBLE PROPERTY .............. i INTRODUCTION .................................................................................................................. 1 CAPITALIZATION OF TANGIBLE PROPERTY – BACKGROUND ..................................... 1 FINAL REGULATIONS - OVERVIEW .................................................................................. 3 GENERAL TERMINOLOGY ................................................................................................. 4 CHAPTER 2 COMPLIANCE CONSIDERATIONS ......................... 11 IMPLEMENTATION OF THE REGULATIONS ................................................................... 11 CAPITALIZATION TO REPAIR STUDIES ......................................................................... 11 STAND DOWN ................................................................................................................... 12 STATISTICAL SAMPLING ................................................................................................. 12 INDUSTRY SPECIFIC GUIDANCE.................................................................................... 13 COORDINATION WITH OTHER CODE SECTIONS ......................................................... 15 EXAMINATION CONSIDERATIONS ................................................................................. 19 INTERVIEW QUESTIONS ................................................................................................. 22 CHAPTER 3 UNIT OF PROPERTY ................................................ 24 INTRODUCTION ................................................................................................................ 24 DETERMINING THE UOP ................................................................................................. 24 BUILDINGS ........................................................................................................................ 26 PROPERTY OTHER THAN BUILDINGS ........................................................................... 29 COST SEGREGATION STUDIES...................................................................................... 31 IMPROVEMENTS TO PROPERTY.................................................................................... 31 ADDITIONAL RULES ......................................................................................................... 32 AUDIT PROCEDURES ...................................................................................................... 33 i | Page CHAPTER 4 AMOUNTS PAID TO ACQUIRE OR PRODUCE PROPERTY .................................................................................... 36 INTRODUCTION ................................................................................................................ 36 GENERAL RULES ............................................................................................................. 36 EXCEPTIONS .................................................................................................................... 37 DEFENSE OR PERFECTION OF TITLE ........................................................................... 37 TRANSACTION COSTS .................................................................................................... 37 SPECIAL RULES ............................................................................................................... 39 AUDIT PROCEDURES ...................................................................................................... 40 CHAPTER 5 DE MINIMIS SAFE HARBOR ................................... 42 INTRODUCTION ................................................................................................................ 42 SAFE HARBOR ELECTION ............................................................................................... 42 SAFE HARBOR REQUIREMENTS AND LIMITATIONS .................................................... 43 APPLICABLE FINANCIAL STATEMENTS ......................................................................... 45 ACCOUNTING POLICY ..................................................................................................... 45 ADDITIONAL RULES ......................................................................................................... 47 EXCEPTIONS TO THE SAFE HARBOR ........................................................................... 48 ANTI-ABUSE RULE ........................................................................................................... 48 AUDIT PROCEDURES ...................................................................................................... 49 CHAPTER 6 IMPROVEMENT RULES – BETTERMENTS ............ 52 IMPROVEMENTS IN GENERAL ....................................................................................... 52 BETTERMENTS ................................................................................................................ 52 APPLICATION OF THE BETTERMENT RULES ............................................................... 54 AUDIT PROCEDURES ...................................................................................................... 57 ii | Page CHAPTER 7 IMPROVEMENT RULES – RESTORATIONS .......... 60 IMPROVEMENTS IN GENERAL ....................................................................................... 60 RESTORATIONS ............................................................................................................... 60 REPLACEMENT OF A COMPONENT OF A UOP – LOSS DEDUCTED (NOT A CASUALTY LOSS)............................................................................................................. 61 REPLACEMENT OF A COMPONENT OF A UOP – GAIN/LOSS REALIZED AND BASIS ADJUSTED ........................................................................................................................ 62 REPLACMENT OF A MAJOR COMPONENT/SUBSTANTIAL STRUCTURAL PART OF A UOP ................................................................................................................................... 63 RESTORATION OF DAMAGE FROM A CASUALTY LOSS .............................................. 67 RETURNS THE UOP TO OPERATIONAL CONDITION – AFTER DETERIORATED AND NON-FUNCTIONAL ........................................................................................................... 68 REBUILDS TO LIKE-NEW CONDITION – AFTER THE END OF CLASS LIFE ................ 69 AUDIT PROCEDURES ...................................................................................................... 70 CHAPTER 8 IMPROVEMENT RULES – NEW OR DIFFERENT USE ................................................................................................. 74 IMPROVEMENTS IN GENERAL ....................................................................................... 74 NEW OR DIFFERENT USE ............................................................................................... 74 AUDIT PROCEDURES ...................................................................................................... 76 CHAPTER 9 SAFE HARBORS – SPECIAL RULES – OTHER PROVISIONS .................................................................................. 78 INTRODUCTION ................................................................................................................ 78 SAFE HARBOR FOR ROUTINE MAINTENANCE ............................................................. 78 SAFE HARBOR FOR SMALL TAXPAYERS ...................................................................... 82 CERTAIN COSTS INCURRED DURING AN IMPROVEMENT .......................................... 84 SPECIAL RULES FOR REMOVAL COSTS ....................................................................... 85 OPTIONAL REGULATORY ACCOUNTING METHOD ...................................................... 87 iii | Page ELECTION TO CAPITALIZE REPAIR AND MAINTENANCE COSTS ............................... 88 ELECTION TO DEDUCT OR CAPITALIZE EXPENDITURES UNDER OTHER IRC SECTIONS ......................................................................................................................... 89 CHAPTER 10 MATERIALS AND SUPPLIES ................................ 90 INTRODUCTION ................................................................................................................ 90 AMOUNTS PAID TO ACQUIRE OR PRODUCE A UNIT OF PROPERTY – EXCEPTION FOR MATERIALS AND SUPPLIES ................................................................................... 90 TIMING OF DEDUCTION FOR MATERIALS AND SUPPLIES .......................................... 90 DEFINITION OF MATERIALS AND SUPPLIES ................................................................. 91 COORDINATION OF §§ 263(a) and 263A ......................................................................... 92 ROTABLE, TEMPORARY, AND STANDBY EMERGENCY SPARE PARTS .................... 93 ELECTION TO CAPITALIZE AND DEPRECIATE ROTABLE, TEMPORARY, AND EMERGENCY SPARE PARTS .......................................................................................... 94 OPTIONAL METHOD OF ACCOUNTING FOR ROTABLE AND TEMPORARY SPARE PARTS ............................................................................................................................... 95 DE MINIMIS SAFE HARBOR ELECTION .........................................................................