Omaha TEI Presentation Tangible property temporary regulations Omaha, NE September 18, 2012 Bryan Pleskac Deloitte Tax LLP Ray Wilson

Outline Effective Dates/Transition Guidance Temporary Regulations Discussion Areas Materials and Supplies De Minimus Rule Units of property Amounts paid to improve property Routine maintenance safe harbor Buildings Disposition, retirements & general asset accounts Transition Guidance/LB&I Directive Action steps

Effective Dates/Transition Guidance

Effective Dates Temporary Regulations are generally effective for taxable years beginning on or after January 1, 2012 Special rules apply for amounts paid or incurred in taxable years beginning on or after January 1, 2012 for: Materials and supplies De minimis rule Costs to facilitate Transition guidance issued March 7, 2012 (Rev. Proc. 2012-19 and 2012-20) Effective for taxable years starting after January 1, 2012 19 possible method changes under the guidance All automatic changes! Must file with 2012 or 2013 return Possibly discuss: when the method changes must be filed.

Temporary Regulations

Temporary Regulations Discussion Areas Materials and supplies De Minimus rule Amounts paid to improve property Buildings Retirements, dispositions and general asset account election

Materials and Supplies – General Rules Material and supplies are tangible property used or consumed in the taxpayer’s operations that is not inventory and is: a component acquired to maintain, repair, or improve a unit of tangible property; fuel, lubricants, water, or similar items that are reasonably expected to be consumed in 12 months or less; a unit of property that has an economic useful life of 12-months or less; a unit of property with an acquisition or production cost less than $100; or property identified in future published guidance If the criteria above met, the item is deemed to be a “material or supply”, and therefore, not subject to capitalization. Optional election to capitalize and depreciate the materials and supplies Special rules for rotable and temporary spare parts

Materials and Supplies – Issues and Considerations What you need to consider: What has changed? Materials and supplies definition has been provided Special methods for rotable spare parts Current treatment of materials and supplies? Timing of deductions - Incidental vs. Non-incidental (e.g. are supplies tracked?) Existence of rotables and current treatment Opportunities within the Temporary Regulations Expanded definition of materials and supplies (e.g. $100 items) Review balance sheet for material and supplies inventories and consider if these items are tracked for their usage Election to capitalize (e.g. NOL preservation)

Deduction limited to greater of: De minimis Rule Applicable Financial Statement (“AFS”) Written capitalization policy Expense in AFS according to written policy Requirements .1% of tax gross receipts, or 2% of depreciation on AFS Deduction limited to greater of:

De Minimis Rule - Example To be eligible for the de minimis rule, the total aggregate amounts paid and not capitalized by the taxpayer must be less than or equal to the greater of $125,000 (0.1 % of its total gross receipts of $125M) or $140,000 (2 % of its total book depreciation/amortization $7M). Because the taxpayer pays $160,000 for the computers and this amount exceeds $140,000, it may not apply the de minimis rule to the total amounts paid for the 400 computers. However, if it makes an election to capitalize $20,000, the amounts paid to acquire 50 of the 400 computers purchased in Year 1, it would not be required to capitalize the amounts paid to acquire the 350 computers in Year 1.

De Minimis Rule – Issues and Considerations What you need to consider: What has changed? Previously no rules or guidance on capitalization thresholds; the temporary regulations now provide that guidance Identification of expenses to consider for the de minimis threshold Identify trial balance account containing tangible property Items qualifying as materials and supplies or repairs and maintenance (e.g. reduction of expenses for de minimis calculation) Items not related to tangible property (e.g. deductible repairs and services) Policy, system updates, and documentation Is the policy being followed (e.g. expenditures outside of policy limit currently deducted)? System updates for expenditure tracking on a go-forward basis (e.g. quantity fields, account mapping, description field assignments, etc.) Document accounts and create calculation templates for compliance workpapers

Amounts Paid to Improve Property Determine the unit of property Apply the improvement standards Consider the routine maintenance safe harbor

Unit of Property Buildings Each building and its structural components is a UoP Improvement standards are applied at the building & building system level Plant Property Functional interdependence is relevant Discrete and major function standard must be applied Network Assets Based on facts and circumstances or as provided in published guidance Functional interdependence test not determinative Leased Property Each building and its structural components (lessor) or the portion of each building subject to the lease and the structural components associated with the leased portion (lessee) Improvement standards are applied to the portion of the building & building systems subject to the lease (lessee) Other Property Functional Interdependence Facts & circumstances

Amounts Paid to Improve Property Determine the unit of property Apply the improvement standards Consider the routine maintenance safe harbor

Capitalize amounts to: Amounts Paid to Acquire or Produce Tangible Property - Temp. Reg. § 1.263(a)-2T Capitalize amounts to: Acquire or produce a unit of real or personal property, Defend or protect title to a unit or real or personal property, or Facilitate the acquisition or production of real or personal property Does not apply to: Amounts treated as materials and supplies under Temp. Reg. § 1.162-3T Amounts subject to de minimis rule

Amounts Paid to Improve Property Improvement Capitalizable Betterment? Restoration? Adaptation?

Amounts Paid to Improve Property Betterment Corrects a material defect existing prior to the taxpayer’s acquisition of the UoP or one that arose during the production of the UoP; Results in a material addition (e.g., physical enlargement, expansion or extension) to the UoP; or Results in a material increase in capacity, strength, productivity, efficiency, quality, or output of the UoP Restoration Repair or replacement of a component of a unit of property and the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss (including casualty loss) Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of nonfunctional disrepair Rebuilding of the unit of property to a like-new condition after the end of its class life Replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a unit of property Adaptation Modification of a unit of property that is not consistent with the taxpayer’s intended ordinary use of the unit of property at the time the property was placed in service

Amounts Paid to Improve Property What you need to consider: What has changed? More clearly defined criteria to determine deductible repairs Review prior repairs studies for impact of changes pursuant to the Tangible Property Regulations Review previously claimed repairs and maintenance expenditures (e.g. line 14) deducted for both book and tax purposes Review fixed asset ledgers for additional repair and maintenance reclassification opportunities pursuant to the Temporary Regulations System Updates, Documentation, and Policy Changes: Updates to capital request forms for tax “unit of property” and tax repairs requirements (e.g. checklists) Provide training sessions to facility managers and engineers to assist in the identification of tax improvements and repairs System updates for units of property, tax only repairs, and documentation of positions

Amounts Paid to Improve Property Determine the unit of property Apply the improvement standards Consider the routine maintenance safe harbor

Routine Maintenance Safe Harbor – Temp. Reg. § 1.263(a)-3T(f) Amount paid is deemed to not improve the unit of property if it is for the recurring activities that a taxpayer expects to perform as a result of the taxpayer's use of the UoP to keep the unit of property in its ordinarily efficient operating condition Safe harbor does not apply to buildings or structural components of buildings (or building systems) Routine maintenance is activities that the taxpayer reasonably expects (at the time the property is placed in service) to perform more than once during the ADS class life of the UoP Consider recurring nature of activity, taxpayer’s experience, manufacturer recommendations, industry practice, treatment on AFS Does not apply to amounts capitalized as betterments, adaptations, and certain restorations

Improvement standards applied to Buildings Unit of Property Each building and its structural components are a unit of property Improvement standards applied to Building systems: heating, ventilation, and air conditioning systems (HVAC) plumbing systems electrical systems all escalators; all elevators fire protection and alarm systems security systems gas distribution systems other structural components identified in published guidance Building structure, which is defined as the building and its structural components (other than the sub-systems above)

Buildings – Issues and Considerations What you need to consider: What has changed? Unit of property for building repairs and retirements re-defined Building systems defined Application to leased property Identification and basis determination: Cost segregation studies, Building construction information (e.g. AIA documents), Other reasonable methods, etc. for basis determination Consider effect of reclassification or cost segregation studies on unit of property Policy, System Updates, and Documentation Identify building systems during construction and segregate in fixed asset systems Update capital request forms for building system specific questions for future projects Document and create calculation templates for compliance workpapers to show break out of building systems and basis information

Dispositions, Retirements & General Asset Accounts (Temp. Reg. §§ 1 Dispositions, Retirements & General Asset Accounts (Temp. Reg. §§ 1.167-8T and 1.168(i)-1T) Retirement of a structural component of a building is a disposition under IRC § 168 Provide rules for accounting for assets to which IRC § 168 applies, and the rules for determining gain or loss on the disposition of such property Rules are critical to operation of the restoration improvement standard General asset accounting and associated elections require affirmative action and must be considered during the placed in service year of an asset to ensure flexibility when evaluating the deductibility of future expenditures

Dispositions and Retirements Gain/loss recognized on retirement of a structural component of a building (now defined as a disposition) Loss (but not gain) recognized on the physical abandonment or transfer to supplies or scrap account (applies to components of buildings as well) Taxpayer may elect to treat a component of a UoP in a general asset account as a specific asset and deduct undepreciated basis at disposition A taxpayer is not precluded from claiming a repair deduction under the casualty loss restoration test for a UoP included in general asset

General Asset Accounts (GAA) Elective Assets may be grouped into a single GAA if— Same depreciation method (cannot combine bonus and non-bonus) Same recovery period Same convention (must be placed in service in same month, quarter, etc.); and Placed in service in same taxable year A single asset can be placed into a GAA If GAA elected, no loss on disposition recognized until all assets in GAA disposed of Can elect to treat a component of an asset as a single asset for disposition purposes Structural components of buildings generally defined under section 48 regulations Definition of component must be consistently used for all assets in a single GAA Election provides flexibility in determining whether to take a loss on a disposition or possibility a deduction for repairs costs (assuming such costs are not a capitalizable improvement)

Retirements, Dispositions & General Asset Accounts – Issues and Considerations What you need to consider: What has changed? Treatment/timing of real property retirements/dispositions Timing for recognition of gains and losses Current retirements methodology (e.g. retiring structural components of buildings) and conformation to Tangible Property Regulations Additional retirement opportunities and impact on repair expenditures (e.g. reverse prior retirements to sustain repair position) Application of GAA elections: Elect GAA on building property (leased and owned) to minimize compliance and avoid lost deductions (e.g. allowed or allowable) Need for GAA elections for personal property (e.g. different book and tax units)

Transition Guidance/LB&I Directive

Transition Guidance Rev. Procs. 2012-19 and 2012-20 issued March 7, 2012 Automatic consent for method changes to comply with temporary regulations for taxable years beginning on or after January 1, 2012 Form 3115s due by extended due date of the return for the tax year of change Temporary regulations cannot be early adopted under this guidance Scope limitations waived for first and second tax years beginning after December 31, 2011 Taxpayers receive back year audit protection upon filing national office copy of Form 3115 National office copy sent to Ogden, UT Taxpayers file a single Form 3115 for all concurrent changes under §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, 1.263(a)-3T Special rules may apply for concurrent depreciation changes Must take into account § 263A

Transition Guidance – Common Method Changes Change to deduct repairs/maintenance and change unit of property for purposes of applying improvement standards Change made with § 481(a) adjustment Can use statistical sampling to compute § 481(a) adjustment and support amounts on post-change returns Statistical sampling methods must comply with Rev. Proc. 2011-42 Change to capitalize (and if applicable, to depreciate) improvements to units of property Change to apply de minimis rule Change made with modified § 481(a) adjustment § 481(a) adjustment takes into account only amounts paid or incurred in taxable years beginning on or after January 1, 2012

Transition Guidance – Common Method Changes Change to dispositions of buildings and structural components Affects determination of gain/loss on disposition and may affect determination of whether expenditure is a capitalizable restoration Change made with § 481(a) adjustment Can use statistical sampling to compute § 481(a) adjustment and support amounts on post-change returns Statistical sampling methods must comply with Rev. Proc. 2011-42 Change to make a general asset account election for MACRS property placed in service in a taxable year beginning before January 1, 2012 May affect determination of whether expenditure is a capitalizable restoration Change made with § 481(a) adjustment if asset is no longer owned by the taxpayer as of beginning of year of change Change made on a modified cut-off basis if assets are owned by the taxpayer as of the beginning of the year of change Unadjusted depreciable basis and depreciation reserve of asset as of beginning of year of change accounted for on new method

LB&I Directive (LB&I-4-0312-004 (3/15/12)) IRS to discontinue current exams with respect to positions taken on original returns relating to— Whether costs incurred to maintain, replace, or improve tangible property must be capitalized under IRC § 263(a) Correlative issues involving the disposition of structural components of a building or dispositions of tangible depreciable assets (other than a building or its structural components) Does not apply to exam activity relating to costs for which the IRS has provided specific guidance separate from the temporary regulations For accounting method changes on or after 12/23/2011 for a tax year beginning before 1/1/2012, exam is to risk-assess the Form 3115 For taxable years beginning on or after 1/1/2012 and before 1/1/2014, exam to determine if taxpayer filed method change pursuant to guidance during scope waiver period

Action Steps

Financial statement impact ASC 740 Considerations Financial statement impact The temporary regulations are prospective. Generally no impact for a financial statement reporting period ending prior to March 7, 2012. Financial accounting treatment depends on taxpayer’s intent to make the accounting method changes under Rev. Procs. 2012-19 and 2012-20 Rev. Procs. 2012-19 and 2012-20 are critical in evaluating unrecognized tax benefit liabilities Rev. Procs. 2012-19 and 2012-20 include automatic consent to change methods of accounting. Rev. Procs. 2012-19 and 2012-20 include waiver of scope limitations and allow taxpayers to change their methods of accounting while under examination. Amounts incurred in taxable years beginning on or after January 1, 2012 Taxpayers may generally begin to account for costs incurred after 12/31/2011 consistent with the temporary regulations if the taxpayers expect to change their method of accounting pursuant to the temporary regulations and the revenue procedures.

Determine how your company will accomplish the following… Understand how the definitions of materials and supplies, UoP improvement, betterment, and routine maintenance affect the way your business capitalizes or deducts assets Understand how the de minimis rule might affect your capitalization threshold Consider how the favorable rules relating to facilitative costs apply in your business Understand whether and to what extent your business currently accounts for dispositions and what the appropriate method(s) might be under the temporary regulations Consider completing an assessment in advance of adopting the Temporary Regulations to determine potential impact and possible system limitations

Contact info Bryan Pleskac 402 997 7816 bpleskac@deloitte.com Ray Wilson 612 397 4704 rawilson@deloitte.com

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

37