A late-breaking change from IRS is eliminating the previously established requirement for small taxpayers to file Form 3115 to request an accounting method change as part of the new rules for accounting for tangible assets. Announced amid the 2014 filing season, this unexpected new development reverses the IRS’ previous guidelines for compliance with new tangible asset regulations, which were effective January 2014.
Until just days ago, even some of the smallest taxpayers that had any business activity were required to file complicated additional tax forms – specifically Form 3115 – to address compliance with new IRS rules with their 2014 tax returns. On February 13, the IRS unexpectedly announced relief to” small business taxpayers” in issuing Revenue Procedure 2015-20, allowing taxpayers, if they choose, to implement the new rules on a cut-off basis, reducing some of the compliance burden and eliminating the need for a form 3115.
In the same revenue procedure, the IRS announced that the Service is now reconsidering whether the $500 de minimis safe harbor is high enough for small businesses and is accepting feedback on the issue.
Who will be affected by the changes?
A small business taxpayer is a business or sole proprietor with assets less than $10,000,000 on January 1, 2014 (for a fiscal year taxpayer), or a business or sole proprietor with average gross receipts over the prior three tax years of $10,000,000 or less.
How will the changes affect me?
Taxpayers meeting the above criteria will have a choice as to whether to adopt the new rules on a cut-off basis or to adopt them under the normal procedures for accounting method changes. Following Friday’s announcement, your tax service provider now has another option to consider when evaluating and recommending the best course of action to meet the new compliance requirements depending on your unique situation.
What if I already filed Form 3115?
RKL was proactive in getting our clients in compliance with the new rules and many of our clients have already filed for the changes under the normal accounting method procedures using Form 3115. This strategy is still allowed under the most recent guidance from the IRS.
Although there are new procedures now available, compliance is still burdensome as taxpayers need to evaluate how and if to change the way they approach tangible asset acquisitions and repairs. Despite the relief now being offered by the IRS, filing Form 3115 under the normal procedures is still preferable in many cases and will provide a more favorable outcome due to:
- The ability to deduct items from prior years that are currently on depreciation schedules
- The ability to make a late partial disposition election for 2014
- The back audit protection afforded by the IRS with a Form 3115 filing
Contributed by Robert M. Gratalo, CPA, MST, a partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.