Certain Taxpayers Granted Limited Relief from Filing Tangible Property Accounting Method Changes
Author: Scott Humphrey
On February 13, 2015, the IRS released Rev. Proc. 2015-20, which provides small taxpayers limited relief from filing accounting method changes for the tangible property regulations, i.e., repair regulations. For the first taxable year beginning on or after January 1, 2014, small taxpayers can make the tangible property accounting method changes prospectively without filing Form 3115, Application for Change in Accounting Method, or attaching any statement with their tax return. The revenue procedure defines a “small taxpayer” as a taxpayer with total assets less than $10 million as of the first day of the taxable year of change, i.e., January 1, 2014, for calendar year taxpayers, or annual average gross receipts of $10 million or less for the prior three taxable years.
The option for small taxpayers to take advantage of this relief does come with a cost. In exchange for providing relief from filing Form 3115 to secure the accounting method change requirements, the IRS removed the ability to deduct previously capitalized repairs or make a late partial disposition election. Also, small taxpayers that rely on the relief provisions will not be afforded audit protection for tangible property-related issues for tax years prior to 2014. In other words, upon examination of a pre-2014 tax year, the IRS could require adjustments to amounts expensed on the original return for items related to the tangible property regulations, e.g., capitalization of a repair that was originally expensed.
As part of the guidance, the IRS also requested comments on the $500 de minimis safe harbor for taxpayers that do not have an applicable financial statement (AFS). The IRS provides those taxpayers (in general, those that do not have audited financial statements) a safe harbor for expensing tangible property with a cost of $500 or less per invoice (or per item as substantiated by the invoice). The IRS requests comments by April 21, 2015, on whether the $500 amount is reasonable or should be increased for taxpayers without an AFS.
At first blush, this relief appears to be welcome news for small taxpayers by allowing adoption of the repair regs on a prospective basis without the need to file Form 3115. However, choosing this option without careful analysis of prior tax accounting methods for repair/capitalization decisions could leave current deductions on the table, open a taxpayer up to costly—and unnecessary—IRS examination adjustments or, for taxpayers contemplating a business sale, lead to additional scrutiny in due diligence. Further, filing a 3115 is the only way to affirmatively show the IRS a taxpayer is changing its accounting methods to comply with the new regulations, which could prove beneficial in future IRS examinations.
In light of this guidance, taxpayers should still evaluate their current and past procedures to determine the exposure and opportunities available under the repair regs. The new regulations offer planning opportunities that may be available for many taxpayers and should be analyzed with your specific facts and circumstances. To learn more about the repair regs and how they affect your business, contact your BKD advisor.