LB&I releases technical guidance on mining industry property
TAX ALERT |
On Sept.11, 2017 the IRS’s Large Business and International Division (LB&I) released a memorandum providing technical guidance to be used in determining the discrete units of property and major components associated with machinery and equipement frequently used in the mining industry.
Repairs, maintenance, replacement and improvement (RMRI) activities constitute significant expenses across in the mining industry. Under the Section 263(a) regulations, determining whether RMRI expenses are deductible repairs or, instead, capitalizible ‘improvements’ depends on whether a unit of property (UOP) is bettered, restored or adapted to a new use. However, before such an analysis can be made, the taxpayer must first identify the relevant UOP and its major components.
Under Treas. Reg. Section 1.263(a)-3(e), the UOP determination is based upon the ‘functional interdepence standard.’ As applied to machinery used in industrial processes, this standard requires taxpayers to
- Identify the all of the components that are ‘functionally interdependent’ (meaning that the placing in service of one component is dependent on the placing in service of another), and
- Then identify the component(s) performing discrete, major fuctions or operations.
Once the taxpayer determines the UOP they then must identify its ‘major components’ (UOP’s components that perform a discrete and critical function in UOP operation).
Due to the heavily interdependent nature of mining equipment, attempts to apply these standards within the mining industry has often resulted in disagreements between taxpayers and the IRS as to the deductibility of RMRI expenses. LB&I has provided guidance and numerous mining-specific examples to clarify the proper application of the UOP and major component definitions to mining activities.
Taxpayers who wish to change their UOP and/or major components classifications to follow this newly issued guidance may do so by filling a Form 3115, Application for Change in Accounting Method, following the automatic consent procedures of Section 11.08 of Rev. Proc. 2017-30 and Rev. Proc. 2015-13.
Interested taxpayers should consult their tax advisers concerning how this guidance may affect their unique tax positions.