Thus, if the allowance method is used, 2012 COGS (before adjustment) will be $84,800, which is $2,000 (500 units multiplied by $4 per unit) more than the year two benchmark.
If the amounts involved are small enough that proper classification on the income statement is not a concern, this issue is probably inconsequential, and the allowance method can be safely used by simply adjusting the allowance to the desired balance at each reporting date (with the other side of the entry to COGS).
She noted that TEI's agenda raises issues relating to (i) a de minimis rule, (ii) restorations that substantially prolong an asset's useful life, and (iii) the repair allowance method.
Twinem suggested that, to minimize controversy over perennially disputed repair amounts, taxpayers should be encouraged to adopt the repair allowance method.
The "repair or improvements" section of the proposed regulations can be divided into four key segments: (i) the operative rule, requiring the capitalization of costs incurred either to materially increase the value of a unit of property, or to restore a unit of property, (ii) standards for determining whether the value of a unit of property has been materially increased, (iii) standards for determining whether the unit of property has been restored, and (iv) an elective repair allowance method.
The repair allowance method treats all amounts (other than "excluded additions") for materials and labor to repair, maintain, or improve all of the taxpayer's repair allowance property in a particular MACRS class as deductible expenses under section 162, up to the "repair allowance amount.
Although taxpayers may not "cherry pick" actual MACRS property in applying the proposed repair allowance method, the proposed regulations do not expressly prohibit the taxpayer from doing so in designating non-MACRS property as being within the scope of the election.
It allows taxpayers to apply the proposed repair allowance method to all of its property not already subject to some other repair allowance election, regardless of whether those assets are otherwise MACRS, ACRS, or pre-ACRS property.
The extent to which particular taxpayers or industries will benefit from using the proposed repair allowance method will depend in large measure upon how closely their actual repair experiences approximate the 50-percent assumption used by Treasury in deriving the repair allowance percentages.