Earlier this year, the IRS relieved small business taxpayers from having to file mandatory Form 3115’s to comply with the newly issued Tangible Property Regulations (TPRs). Accepting this relief under Rev. Proc. 2015-20 is done merely by filing of a federal tax return, leaving many CPAs unaware of the negative consequences of doing nothing. More importantly, many CPAs do not realize they can file a simple "protective" Form 3115 with a zero change to extend the window of time their clients can claim missed repair deductions.
Among other issues, small taxpayers who adopt Rev. Proc. 2015-20 cannot:
- Claim missed repair deductions that were mistakenly capitalized in tax years prior to 2014; or
- Claim late partial disposition deductions on building components that were retired in tax years prior to 2014.
- Deduct removal cost previously capitalized when replacing a portion of the property (for example, the cost incurred to remove the old roof to replace it with a new one)
A "small business taxpayer" for this purpose is any business with total assets of less than $10 million or less than $10 million in average annual gross receipts (from prior three taxable years).
Somewhere in the frenzy of complying with the TPRs this year, many CPAs mistakenly think the window closes for all tax saving opportunities. However, even though 2014 is the last year for both large and small taxpayers to claim late partial disposition deductions, this is not the case for missed repair deductions. Taxpayers can claim missed repair deductions at any time, and in any prior year, as long as they do not adopt Rev. Proc. 2015-20.
KBKG Insight: Small taxpayers may file a "protective" Form 3115 to preserve their rights to claim missed repair deductions from tax years prior to 2014, keeping their ability to file future Form 3115 filings under the guidance of Rev. Proc. 2015-14. The "protective" Form 3115 for change #184 may include a "no-change" with a zero 481(a) adjustment.
Example of Prior Year Capitalization
ABC Company owns an office building. In 2011, it replaced the roof membrane with comparable material at a cost of $100,000. It capitalized the cost and began depreciating it over 39 years.
Under the TPRs the cost of the new membrane could have been expensed when incurred. ABC Company can immediately expense the remaining depreciable basis of the roof membrane in any future tax year by filing Form 3115 with an IRC §481(a) adjustment. Conversely, if ABC Company adopts Rev. Proc. 2015-20, it must forever continue to depreciate the roof membrane.
KBKG Insight: Small taxpayers who do not file Form 3115 related to the Repair Regulations with their 2014 tax return are presumed to have adopted Rev. Proc. 2015-20. As such, these taxpayers automatically forfeit any opportunity to retroactively correct expenditures that could have been expensed in prior years. IRS has yet to issue any guidance on ways to opt out of Rev. Proc. 2015-20. Some advisors are suggesting that filing a "protective" Form 3115 with a zero 481(a) adjustment is necessary but it may be possible to attach a statement to each return stating that the taxpayer opts out of Rev. Proc. 2015-20 provision.
Small taxpayers who have already filed their returns for 2014 without including a TPR related Form 3115 can still file a "Superseded Return" under the Administrative Procedures Relief found in Tres. Reg. 301.9100-2(b). The taxpayer simply needs to write "Superseded Return under Tres. Reg. 301.9100-2(b)" at the top of their originally filed return and attach the "protective" Form 3115 within six months from the original due date. For calendar year partnerships, the last date to file their superseded returns is October 15, 2015.
In order to reserve the right to retroactively claim Tangible Property Deductions, you should file a protective Form 3115.
» For access to the KBKG TPR package, visit: KBKG.com/transfer-pricing.
» For access to the PPI Calculator, visit: KBKG.com/partial-disposition-calculator.
Authors: Gian Pazzia, CCSP; Alex Bagne; So Sum Lee, CPA