Companies are trying to get their arms around some new regulations from the Internal Revenue Service on when to expense or capitalize a whole host of repair and improvement costs – and they aren't even certain yet whether to expect favorable or unpleasant tax results.

The IRS has spent several years developing the regulations, commonly referred to as "repair regulations," with a proposal in 2006 and a revised proposed in 2008. The latest release acts as both a temporary regulation and a new proposal for further comment. The regulations are effective for tax year 2012, but are effective only for three years as the IRS finalizes exactly how it wants these regulations to read. But that's only the beginning of the confusion, says Eric Lucas, a principal for KPMG's national tax practice and former U.S. Treasury official. Taxpayers are awaiting further guidance from the IRS on exactly how to apply the temporary but binding regulations.

The IRS published in the Federal Register temporary regulations that provide guidance on sections 162(a) and 263(a) of the Internal Revenue Code regarding amounts that a taxpayer spends to acquire, produce, or improve tangible property. The regulations clarify and expand standards in the current regulations and provide some bright-line tests for applying the standards. While the temporary regulations are effective for tax year 2012, they also serve as a third proposal on which the IRS is accepting comments.

A recent KPMG survey of 1,900 tax executives revealed that 62 percent aren't sure whether to view the regulations as favorable or unfavorable to corporate taxpayers, while 23 percent said they are favorable and 15 percent said they are unfavorable. Nearly half said they expect the new rules to be difficult to administer. Lucas says despite the confusion or uncertainty, the regulations are effective and require corporate tax departments' swift attention.

Generally, Lucas says companies likely would have experienced a better tax outcome under the 2008 proposal but it's impossible to generalize too broadly because the new regulations will require a great deal of facts-and-circumstances analysis by each corporate taxpayer. The new regulations, as compared with the 2008 proposal, likely will require more items to be capitalized, or depreciated over the useful life of the asset they are meant to improve, rather than expensed immediately, he says. Taxpayers typically prefer immediate expensing to reduce taxable income, accelerating the tax benefit.

Companies that have followed U.S. Generally Accepting Accounting Principles, or financial reporting requirements, for deciding whether a particular cost should be expensed or capitalized for tax purposes are probably taking a conservative approach under the new regulations, Lucas says. “To the extent companies are following GAAP practices, they may not need to be as concerned, but they still need to do the analysis to figure it out,” he says.