Safe harbor methods of accounting for cable network assets

LB&I directive: Safe harbor methods of accounting

The IRS today posted a Large Business & International (LB&I) directive as guidance for IRS examiners to follow concerning examinations of taxpayers using the safe harbor methods of accounting for cable network assets, as described in Rev. Proc. 2015-12. LB&I-04-0415-003 (April 16, 2015)

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Read the LB&I directive.

There are two alternative safe harbor approaches provided by Rev. Proc. 2015-12 for purposes of determining:

  • Whether expenditures to maintain, replace, or improve cable network assets may be deducted or must be capitalized
  • Whether the costs of customer drops and customer premise equipment (CPE) may be deducted or must be capitalized
  • The treatment of the asset and placed-in-service date of a node and fiber optic cable for depreciation purposes
  • Whether, for depreciation purposes, cable distribution network assets are primarily used for providing one-way or two-way communication services

LB&I directive

The LB&I directive instructs IRS examiners to discontinue examining tax years ending before January 1, 2014, that involve the following issues:

  • Whether costs incurred to maintain, replace, or improve cable network assets may be deducted under section 162 or must be capitalized under section 263(a) or section 263A (designated change number 208)
  • Whether costs incurred for customer drops and CPE installations may be deducted under section 162 or must be capitalized under section 263(a) or section 263A (designated change number 209)
  • Any correlative issues involving the disposition of structural components of a building or dispositions of cable network assets (other than a building or its structural components) (designated change numbers 205 and 206)

For tax years ending after December 31, 2013, the LB&I directive instructs examiners to permit taxpayers to change their method of accounting for the first year ending after December 31, 2013. If a taxpayer has not changed its method of accounting to comply with either the safe harbor or the final tangible property regulations, the directive instructs examiners to perform a risk assessment.

Lastly, the LB&I directive provides instruction to examiners regarding the placed-in-service date of a node and fiber optic cable for depreciation purposes and whether cable distribution network assets are primarily used for providing one way or two way communication services for depreciation purposes.

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