Prior to this new Revenue Procedure almost all corporate taxpayers were required to file a change in accounting method, form 3115, with their 2014 tax return (see IRS Eases Repair Regulations for Small Businesses). This form is lengthy and confusing for many tax professionals. For months the AICPA and other organizations have been requesting relief (see AICPA Recommends Changes to IRS Tangible Property Regulations and Why the Industry Is Addressing the IRS Repair Regulations Backwards). Under this new procedure, certain taxpayers have the option of following the new regulations only prospectively, without filing a 3115. Unfortunately, these rules come late for many CPA firms that have spent a significant amount of money and time preparing for these new rules.
The habit for many professionals will be to take the repair regulations less seriously due to the relaxed compliance risk. This would be a mistake as taxpayers still need to be in compliance with these rules moving forward. Additionally, Form 3115 is still required for taxpayers with issues on their returns for years prior to Jan. 1, 2014. Some of the key provisions under these new regulations are detailed below:
Who Is Eligible
This Revenue Procedure allows for eased requirements for small taxpayers. For the purposes of this revenue procedure, a small taxpayer is anyone with total assets of less than $10 million as of the beginning of the first tax year that started on or after Jan. 1, 2014, or with average annual gross receipts of $10 million or less over the three prior tax years. Adding in the “or” makes a majority of the taxpayers that most midsize firms deal with eligible for these relaxed rules. However, it does confirm that a company that does not fit in these rules is required to file a 3115 even if the change is negligible.
Under the old rules, if you filed a 3115 retroactively (i.e., applying the change to all years), the IRS provided audit protection for the years prior to the change in accounting method. What this means is that if you file a change in accounting method for repairs, the IRS cannot audit your calculation on repairs in prior years. It can, however, audit your change in accounting method and your method moving forward. Under this new rule, taxpayers who follow the simplified procedures do not receive the same audit protection.
Requirements to File a 3115 in Certain Cases
If a taxpayer filed a 3115 for a late partial asset disposition (change 196), they are not eligible to file these procedures. Under section 2.11 the IRS requires a 3115 for these situations. Additionally, these changes only allow taxpayers to adopt the new rules prospectively for amounts paid or incurred, or dispositions in tax years, on or after Jan. 1, 2014. A 3115 is required if a taxpayer wishes to apply these changes for expenditures prior to this date.
These changes ease the filing requirements for taxpayers who will not have a 481(a) adjustment. This will lessen the compliance time required to adopt the new regulations for many clients. However, tax preparers still need to ensure that they take extra time to ensure taxpayers are in compliance with these regulations on a retroactive basis. While the IRS has eased the requirements, certain taxpayers may still wish to apply the regulations retroactively to access some of the taxpayer-favorable aspects of this new law.
David McGuire is director of the Cost Segregation Practice at McGuire Sponsel. His expertise includes fixed assets, cost segregation, and depreciation law. His background includes consulting on repair and maintenance studies under the 263(a) regulations and reviewing corporate capitalization policies. He is a frequent speaker on the topic of the repair regulations for accounting training seminars nationwide.
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