Washington Tax Alert June 28, 2007 (rotable spare parts)

Washington Tax Alert from Don Barnes, [email protected]

June 28, 2007

The Service issued a revenue procedure this afternoon ( see Rev. Proc. 2007-48) that allows taxpayers to change their accounting method for rotable spare parts, consistent with the Honeywell and Hewlett Packard cases decided in 1994 and 1995.

In March 2003, the Service ruled that taxpayers may treat rotable spare parts as depreciable assets if the taxpayer’s facts are substantially similar to the facts in the court cases. Further, the Service publicly stated that it intended to issue a revenue procedure permitting an automatic accounting method change “in time for taxpayers to make the change for taxable years ending on or after December 31, 2002.” The Service has finally issued the promised revenue procedure, albeit four years late.

Under Rev. Proc. 2007-48, taxpayers are eligible for a safe harbor method of accounting for rotable spare parts if the taxpayer’s annual gross sales of rotable spare parts are not more than 10% of the taxpayer’s total gross revenues from its maintenance operations for the taxable year. In addition, under the safe harbor method, taxpayers must establish one or more pools for their rotable spare parts. Each pool must include only rotable spare parts that are placed in service by the taxpayer in the same taxable year and have the same depreciation recovery period and depreciation method.