Taxpayers May Lose in IRS Manufacturing Deduction Decision

By Stephen Joyce

Sept. 17—Proposed rules concerning a key manufacturing tax deduction could lead to a reduction in taxpayers qualifying for and claiming the deduction.

The proposed rules seek to address situations such as when general contractors claim the deduction even though they didn't actually manufacture anything; instead, they outsourced the production to a vendor, IRS general attorney Erik Sternberg said at a Sept. 17 conference organized by the New York chapter of the Tax Executives Institute and the Internal Revenue Service.

The IRS will emphasize the deduction should go to the actual party conducting the manufacturing, not an agent associated with the manufacturing, he said.

EY tax partner Jennifer Walsh said the proposed rules, if made final, could result in fewer people claiming the deduction and in some cases, no one claiming an allowed deduction because of confusion over which party is eligible for the deduction.

Neville Jiang, IRS Office of Chief Counsel tax attorney, defended the change, telling Bloomberg BNA that the revenue procedure is favorable to taxpayers because it provides them with more flexibility.

The proposed, final and temporary regulations issued Aug. 26 are intended to clarify which taxpayers are manufacturers and what precisely is manufacturing under tax code Section 199 (REG-136459-09, T.D. 9731). While the temporary rules deal with Form W-2 limitations and are fairly noncontroversial, the proposed rules addressing the manufacturing deduction could receive considerable attention from the taxpayer community. 

Comments on the proposed rules are due in November and a hearing is scheduled for Dec. 16.

Tangible Property Audit Guide

The Treasury Department and the IRS issued final regulations (T.D. 9636) in 2013 concerning whether expenditures related to tangible property are deductible business expenses or non-deductible capital expenditures and combine the case law plus other authorities into a single framework. 

“We have drafted a new audit technique guide; however, I don't know if it's going to be released as an audit technique guide—that's kind of an old nomenclature,” Laurie Schutter, IRS subject matter expert, said at the conference. “It may come out in some other format. That decision has not been made, it's not quite ready to go,” she said of the document, which is currently about 250 pages long.

The document, written for IRS personnel, describes the audit techniques examiners will use when auditing taxpayers regarding the tangible property regulations. Items included in the document include related disposition rules and accounting method changes.

It will also discuss guidance released in the form of revenue procedures discussing specific industries, such as Rev. Proc. 2011-27 and Rev. Proc. 2011-28 addressing telecommunications industry tax issues, she said.

Form 3115 Instructions

On Jan. 16, the IRS issued Rev. Proc. 2015-13, general procedures under Internal Revenue Code Section 446 to obtain agency consent for a change in method of accounting for federal income tax purposes.

The document consolidates the procedures for making automatic and non-automatic accounting method changes under tax code Section 446(e) and Treasury Regulations Section 1.446-1(e); before the release automatic and non-automatic changes were articulated in separate revenue procedures dating back to 1997.

In association with the January release IRS issued an early release of revised Form 3115, Application for Change in Accounting Method, and early-release instructions on the form will be issued “very soon,” Jiang said.

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