Why the Industry Is Addressing the IRS Repair Regulations Backwards
IMGCAP(1)]The 2014 tax season is going to be a stressful one for many people.
Practitioners and taxpayers have to deal with the late passage of the extenders bill, issues stemming from the Affordable Care Act, and the implementation of the new repair regulations. These repair regulations for many practitioners will represent one of the most difficult parts of the tax season.
These new repair regulations are effective for all tax years started on or after Jan. 1, 2014. Not only that, but many of the issues covered in the regulations require that taxpayers implement them on a retroactive basis as well as prospectively.
As many people have already pointed out, this will force most taxpayers to file at least one Form 3115 to be in compliance with the new repair regulations. There has even been talk in the industry, and from the IRS, that taxpayers not filing a 3115 may be at a higher risk of audit due to their lack of addressing the required changes.
In order to limit audit risk, CPA firms have started to file 3115s for their clients all over the country. Unfortunately, due to the fear of compliance risk, many practitioners are starting the analysis with the 3115. This is not the way to start. Saying this does not reduce the importance of the 3115, but the 3115 should be the conclusion of the conversation, not the start.
Each business is different; how they spend money, capitalize and deduct expenses varies. The IRS issued these regulations to standardize many of these procedures. In order to implement these procedures effectively, the tax preparer needs to understand how the new IRS procedures should be followed. The provider then needs to determine how far out of compliance the taxpayer may be with the new regulations.
These conversations may include the following questions:
Do you have a capitalization policy?
How do you determine when an expenditure is a repair?
Do you keep inventory on any of your materials and supplies?
Do you have rotable spare parts?
These and other questions can allow practitioners to then determine how far out of compliance the taxpayer currently may be. Conversations can then be started as to how to get in compliance with these new regulations. By starting the conversation this way, practitioners will find that the 3115 is the conclusion, not the introduction. Which forms to file and the size of the 481a adjustment becomes much clearer at this point. Additionally, a taxpayer can then judge exposure and risk associated with their current methodology.
Preparers and taxpayers do not want to take on more work this time of year. However, due to the complexity of these regulations proper analysis up-front is critical to proper implementation.
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.