Telecoms Get Safe Harbors For Depreciation Of Assets And Repairs Vs Improvements Allocations

IR 2011-36; Rev Proc 2011-22, 2011-18 IRB, Rev Proc 2011-27, 2011-18 IRB, Rev Proc 2011-28, 2011-18 IRB

Three new revenue procedures provide detailed guidance for the telecommunications (telecom) industry with the aim of resolving disputes involving the capitalization and depreciation of network assets. The new guidance resulted from recently completed Industry Issue Resolution (IIR) Program projects addressing big-dollar disputes over how to capitalize network asset repair and replacement costs and the recovery period of assets in the wireless telecom sector.

Rev Proc 2011-22. This provides a safe harbor method of accounting for determining the recovery periods for depreciation of certain tangible assets used by wireless telecommunications carriers.

Sec. 5 of Rev Proc 2011-22, prescribes recovery periods for a number of different, highly technical types of assets located at a mobile telephone switching office and cell sites, which have functions comparable to those of a wireline telephone central office and the associated land line cables. Under Secs. 6 and 7 of Rev Proc 2011-22, affected taxpayers choosing to change to the safe harbor method of accounting generally may use pre-existing change-of-accounting method procedures. However, taxpayers that placed their covered assets in service before Dec. 30, 2003, may treat the change to the recovery periods in Sec. 5 of Rev Proc 2011-22, as not being a change in accounting method, and instead file amended returns to implement the change in depreciation method for covered assets.

Rev Proc 2011-27. This provides two alternative safe harbor approaches for determining whether expenses to maintain, replace, or improve wireline network assets used primarily to provide wireline telecommunication or broadband services must be capitalized under Code Sec. 263(a). Wireline network assets are all personal and real property used by a wireline carrier to provide telecommunication or broadband services, but don't include personal or real property not directly used to provide wireline telecommunication or broadband services, such as a corporate office building and the furniture and equipment used in an office building.

Sec. 5 of Rev Proc 2011-27, essentially permits 12% of the specially computed cost of wireline network assets to be treated as a currently deductible maintenance allowance percentage, with the 88% balance treated as capital expenditures under Code Sec. 263(a). Sec. 6 of Rev Proc 2011-27, provides that IRS will not challenge the unit-of-property determinations carried in Sec. 6 for purposes of the application of Code Sec. 263.

Observation: Under proposed regs issued in 2008, the cost of routine maintenance performed on a unit of property would be treated as not improving that unit of property (and therefore would be currently deductible). IRS officials have said final regs on this subject will be issued “soon.”

Sec. 7 of Rev Proc 2011-27, explains the automatic change in a method of accounting that applies to a change to one of the methods permitted by Rev Proc 2011-27.

Rev Proc 2011-28. This provides two alternative safe harbor approaches for determining whether expenses to maintain, replace, or improve wireless network assets used primarily to provide wireless telecommunication or broadband services must be capitalized under Code Sec. 263(a). Wireless network assets include all personal and real property used by a wireless telecommunications carrier to provide wireless telecommunication or broadband services by mobile phone, but don't include personal or real property not directly used to provide wireless telecommunication or broadband services by mobile phone, such as a corporate office building and the furniture and equipment used in an office building.

The two alternative safe harbor approaches are similar to those provided by Rev Proc 2011-27 for wireline network assets, but the maintenance allowance percentage method allows only 5% of the specially computed cost of wireless network assets to be treated as a currently deductible maintenance expense, with the 95% balance treated as capital expenditures under Code Sec. 263(a).

References: For depreciation recovery periods, see FTC 2d/FIN ¶L-8202; United States Tax Reporter ¶1684.01; TaxDesk ¶266,201; TG ¶14103. For repairs versus improvements, FTC 2d/FIN ¶L-6102; United States Tax Reporter ¶1624.171; TaxDesk ¶308,000; TG ¶16401.