News and Insights

Additional Tax Guidance on Tangible Property Regulations

Tax Development Sep 26, 2016

Additional Tax Guidance on Tangible Property Regulations: Audit Techniques Guide and Frequently Asked Questions Rev. Proc. 2015-56

On September 14, 2016, the Internal Revenue Service (IRS) issued an Audit Techniques Guide (ATG) regarding the capitalization of tangible property, specifically Treasury Regulation § 1.263(a) and related regulations. This ATG relates to the final tangible property regulations under §§ 162(a) and 263(a), regarding the deduction and capitalization of expenditures. These regulations were issued by the IRS on September 19, 2013, and since then, thousands of accounting method changes have been filed by taxpayers. 

To the extent that a taxpayer has subsequently filed an accounting method change pursuant to the issuance of the final tangible property regulations, there is a potential that the IRS will review the positions that have been taken by the taxpayer. Consequently, taxpayers must have detailed, documented records to support their positions since the ATG is quite clear that the burden of proof rests with the taxpayer.       

The objective of any ATG is to provide IRS agents with a good understanding of the relevant subject matter while providing direction to its IRS agents in the examination of taxpayers in identifying any potential tax issues. Additionally, ATGs generally serve as a safe harbor for taxpayers if they don’t deviate from the IRS’s assertions.  

With the issuance of the final tangible property regulations, taxpayers have a clearer understanding of how to define the unit of properties associated with their assets and ultimately better guidance with more clarity to determine whether expenditures are deductible or capital improvements. However, these regulations are vast and complex, and there are two opposing driving forces when determining an expense versus a capital improvement, and they are either 1) increasing tax revenue from an IRS perspective or 2) providing a significant tax benefit from a taxpayer perspective. Thus, the IRS is gearing up by providing its agents with this ATG to verify whether or not taxpayers have fairly interpreted these regulations for the tax positions that they have taken on their tax returns. 

In addition to the ATG, on September 19, 2016, the IRS published Frequently Asked Questions (FAQ) as they relate to Revenue Procedure 2015-56. Please refer to the Ryan Tax Development released on November 24, 2015 for more insight on Rev. Proc. 2015-56. The FAQ addresses the following areas:

  • Changing a method of accounting to use the remodel-refresh safe harbor;
  • Qualifying for the remodel-refresh safe harbor;
  • Using the remodel-refresh safe harbor method; and
  • Coordination with other provisions of the code and regulations.

Accordingly, the ATG and FAQ are intended to provide assistance to taxpayers on the implementation of the tangible property regulations and the remodel-refresh safe harbor accounting method, respectively, while also providing direction to the IRS service teams in the examination of the positions that the taxpayers have taken on their tax returns. 

Ryan’s Fixed Asset practice has worked with various IRS service teams on these issues. 


John Belpedio