The American Institute of CPAs is asking the Internal Revenue Service to simplify the interest capitalization regulations and make them less of a burden.
In a letter Wednesday to the IRS, the AICPA asked the agency to revise the tax regulations under section 263A(f), “Special Rules for Allocation of Interest to Property Produced by the Taxpayer,” which have changed little since they were issued in 1994. On the other hand, the business operations of taxpayers have undergone significant change since the IRS issued a notice addressing the application of the rules to related parties and pass-through entities.
“The final section 263A(f) regulations require taxpayers to track designated property on an individual unit basis for purposes of allocating capitalized interest,” wrote AICPA Tax Executive Committee chair Annette Nellen. “In certain industries where taxpayers may have tens of thousands of units (or even more) that constitute designated property, the administrative burden and complexity of complying with the interest capitalization regulations is substantial.”
The AICPA recommended the Treasury Department and the IRS modify Rev. Proc. 2016-29 (or its successor) to include all accounting method changes a taxpayer would need to comply with section 263A(f) and that accounting method changes made by a taxpayer to comply with section 263A(f) are, in general, made with a section 481(a) adjustment and receive audit protection for prior years.
The AICPA also recommended the IRS issue proposed regulations providing related party rules. The IRS should also offer an optional safe harbor to follow book or the regulatory interest capitalization method, the AICPA suggested. The IRS should permit the allocation of capitalized interest among units of property using a reasonable method, according to the AICPA, and the agency should also simplify the rules for capitalizing interest related to inventory. The AICPA also asked the IRS to provide an election for taxpayers to opt out of the de minimis safe harbor, and to permit all taxpayers to elect to use the applicable federal rate plus three percentage points in lieu of the weighted average interest rate. The IRS should also supply an election to not trace debt in the year traced debt is first incurred.
“The AICPA is confident that implementing our recommendations will promote voluntary compliance and reduce controversy,” Nellen wrote.
She pointed out that the AICPA had previously recommended the Treasury Department's 2016-2017 Priority Guidance Plan should include a project to clarify and simplify the interest capitalization regulations to make them easier to administer.