IRS ISSUES ACCOUNTING METHOD CHANGE GUIDANCE IN TWO REVENUE PROCEDURES TO COMPLY WITH TANGIBLE PROPERTY REGULATIONS

BDO FIXED ASSETS ALERT 1 MAY 2012 WWW.BDO.COM SUBJECT IRS ISSUES ACCOUNTING METHOD CHANGE GUIDANCE IN TWO REVENUE PROCEDURES TO COMPLY WITH TANGIBLE PROPERTY REGULATIONS SUMMARY On March 7, 2012, the Internal Revenue Service issued Revenue Procedures ( Rev. Proc. ) 2012-19 and 2012-20 providing guidance on filing accounting method changes to comply with the tangible property regulations that were issued in temporary and proposed form on December 23, 2011. In general, Rev. Proc. 2012-19 addresses the capitalization or deductibility of costs under sections 162 and 263(a). Rev. Proc. 2012-20 addresses the depreciation and disposition accounting methods for depreciable property pursuant to sections 167 and 168. These procedures amend Rev. Proc. 2011-14, which provides the general procedures for making automatic consent accounting method changes, by introducing close to twenty new automatic changes. The new automatic changes reflect the methods of accounting described in the temporary regulations. The new automatic accounting method changes generally include a cumulative section 481(a) adjustment, except in limited cases noted herein where changes are made on a modified section 481(a) adjustment (i.e., amounts paid or incurred in taxable years beginning on or after January 1, 2012) or a cut-off basis. CONTACT: JOHN SALZA Partner, Accounting Methods 414-287-1123 / jsalza@bdo.com KATHLEEN MEADE Senior Director, Accounting Methods 732-734-1015 / kmeade@bdo.com YUAN CHOU Senior Manager, Accounting Methods 301-634-4949 / ychou@bdo.com NATHAN CLARK Senior Director, Fixed Asset 704-887-4205 / nclark@bdo.com MARLA MILLER Senior Manager, Fixed Asset 215-636-5520 / mmiller@bdo.com CHRIS BARD Principal, Fixed Asset Advisory Services 310-557-7525 / cbard@bdo.com DAN FULLER Senior Director, Fixed Asset 616-802-3406 / dfuller@bdo.com Read more

BDO ACCOUNTING METHODS & FIXED ASSET ADVISORY SERVICES TAX ALERT 2 The temporary regulations generally apply for taxable years beginning on or after January 1, 2012. Similarly, Rev. Procs. 2012-19 and 2012-20 are effective for taxable years beginning on or after January 1, 2012. Starting in 2012, all taxpayers will likely have to change their current methods of accounting to comply with these temporary regulations. Accordingly, taxpayers should take action, particularly within the first or second taxable year beginning after December 31, 2011 (i.e., the two-year scope limitation waiver as discussed below), to assess their tax accounting methods for opportunities to conform to these new rules in order to optimize cost recovery and manage IRS audit risk. HIGHLIGHTS OF REV. PROC. 2012-19 Rev. Proc. 2012-19 modifies Rev. Proc. 2011-14 by adding the following automatic method changes to the Appendix ( * denotes method changes implemented with a modified section 481(a) adjustment): 1. Deducting repair and maintenance costs Rev. Proc. 2011-14 is modified by removing the earlier automatic method change procedures relating to repair and maintenance costs. Effective for taxable years beginning on or after January 1, 2012, this new change applies to a taxpayer that wants to change from capitalizing to deducting amounts paid or incurred for tangible property as repair and maintenance costs under section 162 and Temp. Reg. 1.162-4T. In addition, this change also permits a taxpayer to change its units of property under Temp. Reg. 1.263(a)-3T(e) solely for purposes of determining whether amounts paid or incurred improve a unit of property under Temp. Reg. 1.263(a)-3T. Notably, a taxpayer must attach a schedule for the section 481(a) adjustment listing the adjustment amounts for each property classification (e.g., 5-year property, 7-year property, or nonresidential real property). 2. Change to the regulatory accounting method This new change applies to a regulated taxpayer that wants to change to follow its method used for regulatory accounting purposes to determine whether amounts paid or incurred to repair or maintain tangible property improve property under Temp. Reg. 1.263(a)-3T. 3. Deducting non-incidental materials and supplies when used or consumed* This new change applies to a taxpayer that wants to change its method of accounting for non-incidental materials and supplies to comply with the new definitions prescribed in Temp. Reg. 1.162-3T and to change to the method of deducting such amounts in the taxable year in which they are actually used or consumed. 4. Deducting incidental materials and supplies when paid or incurred* This new change applies to a taxpayer that wants to change its method of accounting for incidental materials and supplies to comply with the new definitions prescribed in Temp. Reg. 1.162-3T and to change to the method of deducting such amounts in the taxable year in which they are paid or incurred. 5. Deducting non-incidental rotable and temporary spare parts when disposed of* - This new change applies to a taxpayer that wants to change its method of accounting to deduct costs to acquire or produce non-incidental rotable and temporary spare parts in the taxable year in which the parts are disposed of by the taxpayer. 6. Change to the optional method for rotable and temporary spare parts - This new change applies to a taxpayer that wants to change its method of accounting for rotable and temporary spare parts to the optional method of accounting. 7. Deducting dealer expenses to facilitate the sale of property - This new change applies to a dealer in property that wants to change its method of accounting to treat commissions and other costs paid or incurred to facilitate the sale of tangible property as ordinary and necessary business expenses. 8. Deducting de minimis amounts* - This new change applies to a taxpayer that wants to change its method of accounting to apply the de minimis rule, under Temp. Reg. 1.263(a)-2T(g) and 1.263A-1T(b)(14), to amounts paid or incurred to acquire or produce (including any amounts paid or incurred to facilitate the acquisition and production of) a unit of property.

BDO ACCOUNTING METHODS & FIXED ASSET ADVISORY SERVICES TAX ALERT 3 9. Deducting certain costs for investigating or pursuing the acquisition of real property* - This new change applies to a taxpayer that wants to change its method of accounting from capitalizing to deducting amounts paid or incurred in the process of investigating or otherwise pursuing the acquisition of real property, if the amounts (1) meet the requirements of Temp. Reg. 1.263(a)-2T(f)(2)(iii) or (2) are for employee compensation or overhead costs. 10. Change to the safe harbor for routine maintenance on property other than buildings - This new change applies to a taxpayer that wants to change its method of accounting to treat amounts paid or incurred for routine maintenance performed on a unit of property as amounts that do not improve the unit of property. 11. Non-dealer expense to facilitate the sale of property - This new change applies to a taxpayer that is not a dealer in property and wants to change its method of accounting to capitalize commissions and other costs paid or incurred to facilitate the sale of property. 12. Capitalizing acquisition or production costs - This new change applies to a taxpayer that wants to change its method of accounting to capitalize amounts paid or incurred to acquire or produce property under Temp. Reg. 1.263(a)-2T and, if depreciable, to depreciate such property under section 168. 13. Capitalizing improvements to tangible property - This new change applies to a taxpayer that wants to change its method of accounting to capitalize amounts paid or incurred for improvements to units of property consistent with Temp. Reg. 1.263(a)-1T and 1.263(a)-3T and, if depreciable, to depreciate such improvements under section 168. HIGHLIGHTS OF REV. PROC. 2012-20 Rev. Proc. 2012-20 modifies Rev. Proc. 2011-14 by adding the following new automatic method changes ( * denotes method changes implemented in part with a modified section 481(a) adjustment or cut-off basis): 1. Depreciation of leasehold improvements - This new change applies to a taxpayer that wants to change its method of accounting to comply with Temp. Reg. 1.167(a)-4T for leasehold improvements in which the taxpayer has a depreciable interest at the beginning of the year of change. Specifically, it allows a taxpayer to change from an improper method of depreciating or amortizing a leasehold improvement over the length of the lease term to a proper method of adopting the applicable cost recovery provisions without regard to the length of the lease term. 2. Permissible to permissible method to accounting for depreciation of MACRS property* - This new change applies to a taxpayer that wants to change from a permissible to another permissible method of accounting for MACRS depreciation. Generally, a taxpayer currently using a permissible method may change its method of accounting for asset accounts (i.e., single, multiple, or general) and for dispositions from these accounts (i.e., specific identification, FIFO, modified FIFO, or mortality dispersion table). Method changes for asset accounts are implemented with a modified cut-off method, under which the unadjusted depreciable basis and the depreciation reserve of the asset as of the beginning of the year of change are accounted for using the new method. Method changes for dispositions of MACRS property are made on a cut-off basis or a section 481(a) adjustment, depending on the taxpayer s current method of accounting for dispositions. 3. Disposition of a building or structural component Rev. Proc. 2011-14 is modified by removing the earlier automatic method change procedures relating to dispositions of structural components of a building. This new change prescribes certain enumerated changes in methods of accounting for a building, condominium unit, cooperative unit, structural component, or an improvement or addition thereto. This change will also affect the determination of gain or loss from the disposition of a building or structural component and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. Note: Property for which a valid general asset account ( GAA ) election has been made is excluded.

BDO ACCOUNTING METHODS & FIXED ASSET ADVISORY SERVICES TAX ALERT 4 4. Disposition of tangible depreciable assets other than a building or its structural components - Rev. Proc. 2011-14 is modified by removing the earlier automatic method change procedures relating to dispositions of tangible depreciable assets other than a building or its structural components. This new change prescribes certain enumerated changes in methods of accounting pertaining to the disposition of section 1245 property or a depreciable land improvement. This change will also affect the determination of gain or loss from the disposition of section 1245 property or the depreciable land improvement and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. Note: Property for which a valid GAA election has been made is excluded. 5. Disposition of tangible assets in a general asset account* - This new change prescribes certain enumerated changes in methods of accounting pertaining to the disposition of an asset for which a taxpayer made a valid GAA election. This change will also affect the determination of gain or loss from the disposition of section 1245 property or the depreciable land improvement and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. 6. General asset account elections - This new change permits taxpayers, in the first two years beginning after December 31, 2011, to make late GAA elections for one or more items of MACRS property placed in service prior to January 1, 2012, or recognize gain or loss upon certain dispositions from GAAs. This change may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. STATISTICAL SAMPLING Both revenue procedures provide guidance on the use of statistical sampling techniques to support the computation of the section 481(a) adjustment for most of the new method changes. When statistical sampling is specifically addressed, Rev. Procs. 2012-19 and 2012-20 require taxpayers to follow the guidance in Rev. Proc. 2011-42. Where the Service is silent on statistical sampling for certain changes, the IRS position appears to be that it will be the field s discretion to make a determination. TWO-YEAR WAIVER OF SCOPE LIMITATIONS AND AUDIT PROTECTION Generally, taxpayers are prohibited from filing automatic method changes to the extent that one of the scope limitations of section 4.02 of Rev. Proc. 2011-14 (e.g., under examination, final year of trade or business, prior five-year same item change) applies. However, these scope limitations are waived if a taxpayer makes a change in accounting method for the first or second taxable year beginning after December 31, 2011. The regulations do not modify the general rule providing audit protection for a taxpayer that voluntarily changes from an improper to a proper method of accounting in compliance with the regulations. Audit protection is triggered on the date the Form 3115, Application for Change in Accounting Method, is filed with the IRS Ogden, Utah office in lieu of the IRS National Office. IRS LB&I DIRECTIVE Subsequent to the issuance of Rev. Procs. 2012-19 and 2012-20, the IRS Large Business & International Division issued a directive instructing examiners to refrain from new examinations and to withdraw notices of proposed adjustments for ongoing examinations until 2014. The directive applies to positions taken on original returns involving whether costs incurred to maintain, replace, or improve tangible property must be capitalized under section 263(a) and correlative issues involving dispositions of structural components of a building or tangible depreciable assets other than a building or its structural components.

BDO ACCOUNTING METHODS & FIXED ASSET ADVISORY SERVICES TAX ALERT 5 OPPORTUNITIES FOR TAXPAYERS Taxpayers are required to conform to these new rules. To that end, taxpayers should assess their tax accounting methods for opportunities to optimize cost recovery and manage IRS audit risk. Where methods do not conform to the temporary tangible property regulations, these revenue procedures provide extensive guidance to request automatic accounting method changes and compute a section 481(a) adjustment. Taxpayers interested in making one or more of these accounting method changes under Rev. Proc. 2012-19 or Rev. Proc. 2012-20 must file Form 3115 with their timely filed (including extensions) federal income tax return for taxable years beginning on or after January 1, 2012, and mail a Form 3115 copy to the IRS Ogden, Utah office no later than the filing date of that return. Rev. Proc. 2012-19 provides that a taxpayer filing any of the new changes for the same taxable year may include all such changes concurrently on a single Form 3115 application, but the item being changed, present and proposed method, and section 481(a) adjustment must be specified for each change. The Tax Practice at BDO is among the largest tax advisory practices in the United States. With 40 offices and more than 400 independent alliance firm locations in the United States, BDO has the bench strength and coverage to serve you. BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,118 offices in 135 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com. To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this tax alert is meant to provide general information and should not be acted on without professional advice tailored to your firm's individual needs. 2012 BDO USA, LLP. All rights reserved. www.bdo.com