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IRS Ends Confusion Over Form 3115 Requirements, Provides Relief to Small Businesses.

(Parker Tax Publishing March 2, 2015)

The IRS has ended much of the confusion surrounding the Form 3115 filing requirements, granting major relief to small business taxpayers by waiving the requirement to file the form, and instead allowing small business taxpayers to opt for a simplified procedure for changing accounting methods under the final repair regulations. Such changes can be made on a prospective basis (cut-off method) for tax years beginning in 2014. Rev. Proc. 2015-20 (2/13/2014).

Background

The IRS issued final regulations in T.D. 9636 (2013 "repair regulations") and T.D. 9689 (2014 "asset disposition regulations") which ushered in sweeping changes in how businesses must account for tangible property. In 2014, the IRS issued Rev Procs. 2014-16, 2014-17, and 2014-54 (which have since been largely superseded by Rev. Proc. 2015-14) detailing the procedures taxpayers must follow to obtain automatic consent for making changes in accounting method required by the tangible property regulations. The new rules generally apply to tax years beginning in 2014.

Since the regulations and the accompanying accounting method change procedures were published, the IRS has received numerous requests to simplify the process for small businesses to start applying the rules.

Many tax professionals became concerned that nearly every business with depreciable property would have to file a Form 3115 to adopt any applicable method of accounting rules changed by the regs, even though the change had been initiated by the IRS (in the form of new regs), not the taxpayer. Many practitioners found this prospect daunting, as Form 3115 is notoriously difficult and time-consuming to complete.

Revenue Procedure 2015-20 Provides Relief

To ease the administrative burden faced by small business taxpayers in applying the tangible property regulations, Rev. Proc. 2015-20 allows eligible businesses to apply the new regulations on a prospective basis to tax years beginning in 2014. Applying the rules prospectively (a.k.a. "the cut-off method") eliminates the need to make a Code Sec. 481(a) adjustment related to prior tax years.

OBSERVATION: For purposes of Rev. Proc. 2015-20, a "small business" is defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years.

Small business taxpayers that choose to prospectively apply the tangible property regulations to amounts paid or incurred for, and dispositions of, tangible property beginning in 2014, have the option of making certain changes of methods of accounting on their federal tax return without including a Form 3115 or a separate statement. A taxpayer that chooses to use the cut-off method for applying the asset disposition regulations must also use the cutoff method when applying the repair regulations and vice versa (Rev. Proc. 2015-20, Sections 2.10 and 2.11).

Additionally, small business taxpayers who choose not to file a Form 3115 will not be able to make late partial asset disposition elections, and they will not receive the benefit of "audit protection" provided by Form 3115.

Caution: The final tangible property regulations have not been changed; Rev. Proc. 2015-20 only provides streamlined procedures for taxpayers to adopt the new regulations and to avoid the burdens of filing Form 3115. Nothing in the Rev. Proc. absolves small business taxpayers of their obligation to otherwise comply fully with the tangible property regulations starting with tax years beginning in 2014.

Accounting Method Changes Covered by Revenue Procedure 2015-20

The relief provided by Rev. Proc. 2015-20 applies to most, but not all, of the accounting method changes that may be triggered by compliance with the new tangible property regulations. Changes to which the revenue procedure applies are as follows (the numbers are the designated "automatic change numbers" from Rev. Proc. 2015-14):

184. Change to deducting repair and maintenance costs or a change to capitalizing improvements to tangible property and to depreciating such property. Includes a change, if any, in the method of identifying the unit of property, or in the case of a building, identifying the building structure or building systems.

185. Change to the regulatory accounting method.

186. Change to deducting non-incidental materials and supplies when used or consumed.

187. Change to deducting incidental materials and supplies when paid or incurred.

188. Change to deducting non-incidental rotable and temporary spare parts when disposed of.

189. Change to the optional method for rotable and temporary spare parts.

190. Change by a dealer in property to deduct commissions and other costs that facilitate the sale of property.

191. Change by a non-dealer in property to capitalizing commissions and other costs that facilitate the sale of property.

192. Change to capitalizing acquisition or production costs and, if depreciable, to depreciating such property.

193. Change to deducting certain costs for investigating or pursuing the acquisition of real property.

200. Change in method of identifying assets disposed of in multiple asset accounts.

205. Change in determining real property assets disposed of.

206. Change in determining other assets disposed of.

Changes not covered by Rev. Proc. 2015-20 will require filing a Form 3115 to obtain automatic IRS consent. Most notably, the revenue procedure does not cover Change Number 196, the late partial disposition election for depreciable assets disposed of prior to 2014.

Interaction with Partial Asset Disposition Rules

Taxpayers availing themselves of relief provided by Rev. Proc. 2015-20 are not permitted to elect partial disposition treatment for assets disposed of in tax years beginning prior to 2014. Such "late partial asset dispositions" are only available to taxpayers who file Form 3115 indicating the appropriate change (i.e., Change Number "196").

Under the partial disposition rules of Reg. Sec. 1.168(i)-8, if a taxpayer replaced a unit of tangible property (a roof, for example), the taxpayer can determine what the basis of that property was at the time it was replaced and deduct the remaining basis in order to avoid depreciating duplicative assets (e.g. the old roof and the new roof). Taxpayers may make such an election on an annual basis for qualifying dispositions occurring during the year. If such an election is made with respect to property repaired or replaced prior to 2014, it is considered a "late" partial disposition.

Taxpayer wishing to reap the benefit of accelerated deductions from making a late partial disposition election will have no choice but to bear the costs and/or burdens of filing Form 3115.

Option to Withdraw Previously Filed Form 3115

Rev. Proc. 2015-20 provides a transition rule that allows a small business taxpayer that has previously filed its 2014 return with a Form 3115 to withdraw the form (provided the Form 3115 made a change to a method of accounting specified in the revenue procedure). To withdraw the Form 3115, the taxpayer must file an amended return by the due date of the original return (including any extension). There is nothing in Rev. Proc. 2015-20 indicating that the transition rule is limited to returns filed before the Rev. Proc. was issued (2/13/2015). (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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