Fall 2012 issue of Horizons

MANUFACTURING & DISTRIBUTION

Expensed Versus Capitalized: Tangible Property by Henry Rzonca, CPA

M any manufacturers struggle with determining whether expenditures made that are related to tangible property are to be expensed or capitalized. In December 2011, the IRS issued temporary regulations effective for tax years beginning on or after January 1, 2012 to provide guidance on the application of Code Section 162(a) and Code Section 263(a) for amounts paid to acquire, produce, or improve tangible property. Under Regulation § 1.263(a)-3T, amounts paid to improve tangible property, a taxpayer generally must capitalize the aggregate of related amounts paid to improve a unit of property owned by the taxpayer.

“unit of property” and then determine if an “improvement” has been made.

What is a Unit of Property? The definition of unit of property depends on the property type. Regulation § 1.263(a)- 3T(e) provides the definition of unit of property for:

∙ A building

∙ Plant property

∙ Network assets

∙ Leased property other than buildings

∙ Other property

In order to determine if the expenditure must be capitalized one must first define the

page 28 | horizons Fall 2012