The IRS Large Business & International Division has issued a memorandum (LB&I-04-0917-004) dealing with the classification of various types of mining equipment to determine units of property and major components under Reg. §1.263(a)-3(e).
The memo is meant to provide some consistently and eliminate confusion over what are units of property and major components of units of property for mining organizations. However, since making use of definitions will likely change how an organization has been classifying items as units of property or major components, an entity wishing to make use of this provision will need to go through the procedures for a change of accounting method.
The memorandum has guidance that would apply to taxpayers under examination, guidance that changes depending on whether the taxpayer wishes to adopt this method and whether the taxpayer had properly filed a request for a change of method to deal with the current regulations in this area.
However, for taxpayers not currently under examination, the memo provides the following guidance:
A taxpayer that chooses to change the definition of its UOP and major components as described in this directive must follow the automatic change in method of accounting provisions contained in section 11.08 of Rev. Proc. 2017-30, 2017-18 I.R.B. 1131. Such a change constitutes a change in method of accounting to which the provisions of I.R.C. §§ 446 and 481, and the associated regulations thereunder, apply.
Taxpayers in the mining industry and those advising them should consult this memorandum to decide if the taxpayer should move to adopt the classifications in the memorandum or use other classifications that the taxpayer believes are defensible under the regulations.
The memorandum provides a list of items that will be treated as constituting a unit of property as well as major components of those units of property. These definitions would be used to determine what is to be capitalized or expensed pursuant to the rules under Reg. §1.263(a)-3.