Numerous tax professionals have struggled with the compliance requirements under the final Tangible Property Regulations (TPRs) and when Form 3115, Application for Change in Accounting Method, is required. In response to public concerns, the IRS issued Rev. Proc. 2015-20 providing a simplified method of compliance for small business taxpayers.
The new revenue procedure allows small businesses (i.e., less than $10M in assets or less than $10M in average annual gross receipts) to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014. Further, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014. Rev. Proc. 2015-20 confirms KBKG’s long-standing position that the IRS is not looking to penalize tax professionals or taxpayers who have substantially complied with the new TPRs but have not filed Form 3115s when no IRC §481(a) adjustment is required.
- Taxpayers meeting the definition of a small business still have the option to file Form 3115. For example, a taxpayer wanting to make a late partial disposition (e.g., to take a loss on disposed HVAC components or tenant improvements – CAM #196) would still file Form 3115.
Planning Note: KBKG recommends not using Rev. Proc. 2015-20 in situations where taxpayers have been overly conservative in their capitalization policies or have significant amounts of retired building components, as these taxpayers may miss significant opportunities to accelerate deductions.
- In certain instances, small businesses are required to file Form 3115. For example, correcting depreciation errors made in prior years (e.g., an adjustment for inappropriately deducting the cost of a whole new roof when capitalization is required – CAM #184) require filing of Form 3115.
- Election statements are still required for the de minimis safe harbor, the small taxpayer safe harbor, and the election to capitalize repair and maintenance costs.
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