Although the new repair regulations have been known and talked about for several years, this past tax season was the first in which preparers had to actually understand them, explain them and apply them to clients’ returns.
“The IRS has been grappling with capitalization versus repairs for some time, and they finally codified the regs,” said Michael Silvio, managing director with Top 10 Firm CBIZ MHM LLC. “In 2012 they said you can early adopt, but everyone has to do it by the due date of their 2014 return.”
During the past filing season, preparers were faced with the dilemma of what to do about the regs, he indicated. “A great many preparers just put everything on extension with the intent to look at them during the summer and figure out what to do.”
“What threw everyone for a loop is the fact that the revised regs came out in August last year, so there was not a whole lot of time to look at them and implement them during busy season,” he continued. “Relief — in the form of Rev. Proc. 2015-20 — came in February, right in the middle of tax season.” The revenue procedure excludes businesses with less than $10 million in assets or average gross receipts for the prior three years from the necessity of filing a Form 3115, to change their accounting method.
HARD FOR SOME
“Overall, the tangible property regs changed much in terms of what was allowed to be expensed versus capitalized,” observed Mark Luscombe, principal federal tax analyst at Wolters Kluwer. “If you have a history of assets that you’ve been depreciating over the years to comply with the change, you have to go back and adjust the depreciation history to reflect the accounting method change.”
On the whole, the IRS thought it was liberalizing things and making it possible to expense more than you could in the past, he added. “If you take advantage of Rev. Proc. 2015-20, you start from 2014 and go forward, but you don’t make historic adjustments, so you may lose some of the additional deductions that you would get from going back and making prior-year adjustments, and also audit protection for those prior years.”
Some have suggested that failing to file Form 3115 this year may cause the return to be put in a pile for special attention, but others say the IRS is so overwhelmed by 3115s that they won’t be able to give anyone special attention, according to Luscombe: “Revenue Procedure 2015-20 was in response to complaints by the American Institute of CPAs that this was a huge burden on small businesses, and the cost of complying with the regulations was excessive compared to the benefits that they could obtain.”
“The way the regulations were rolled out made a real burden at first for smaller taxpayers, those that are not as sophisticated or who didn’t keep their books as well as some of our larger clients,” said Andrew Rotter, a partner at Top 25 Firm Citrin Cooperman. “The de minimis safe harbor basically allows people to expense and not capitalize certain items. The difference in what you can expense and what needs to be capitalized depends on whether you had an applicable financial statement.”
One of the biggest problems during tax season was with smaller taxpayers — what they had to comply with, and what they didn’t have to comply with, according to Rotter. “It was really confusing to them, but then the IRS came out with the revenue procedure for smaller taxpayers, which got them a little off the hook on certain reporting requirements.”
HARDER FOR OTHERS
If your practice dealt with a lot of business or rental property owners, then those regulations had a big impact on your tax season, and the amount of time you had to spend, according to Roger Harris, president of Padgett Business Services.
“Under the regulations, all costs that facilitate the acquisition or production of property must be capitalized. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized. Exemptions to the general rule include a de minimis safe harbor, which requires an annual election; a routine maintenance safe harbor, with no election required; and a per-building safe harbor for small businesses, with no annual election required,” he said.
“Form 3115 is not needed if you are merely adopting repair regulations to tax year 2014 and future years, but is required if you wish to go back and apply the repair regulations as it relates to recognizing a loss on assets taken out of service,” Harris explained.
There were three distinct processes involved with the regs, according to Harris: “First, you had to learn for yourself what the regs mean; second, you had to explain them to your clients; and third, you had to apply them on the taxpayer’s return. And then there was the confusion at the beginning of the tax season as to where Form 3115 fit in, and whether the form needed to be filed at all.”
“You had to communicate to clients why their fees were going up, and what record-keeping needed to be done differently to allow us to properly apply the regs to individual taxpayers,” he continued. “The taxpayer might get the tax benefit but had to accept the additional burden of record-keeping or higher compliance fees to analyze each taxpayer’s situation as it pertained to the regs.”
Although not voted on by a single elected official, the new regs rewrite a vast body of law and tax accounting principles, according to John Hackney, a tax partner and former CPA at Chamberlain Hrdlicka: “For larger taxpayers, they presented the opportunity to go back and look at your fixed asset schedule and decide whether you’re complying with current methods of accounting following the new regs, and whether there is the opportunity for a favorable Section 481 adjustment.”
“However, for more modest taxpayers, they’re essentially looking at a fairly high compliance burden to figure out if they can comply with the massive set of new regulations,” he said.
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