IRS Simplifies Implementation of Repair Regs for Small Taxpayers (article)
The IRS last Friday issued Rev. Proc. 2015-20 which allows qualifying small taxpayers on 2014 tax returns to implement the tangible property regulations (TPRs) on a cut-off basis and without filing Form 3115. Given that the TPRs impact virtually all taxpayers with tangible business property (real or personal), materials and supplies, or repairs and maintenance expenditures, Rev. Proc. 2015-20 comes as welcome relief to those taxpayers who choose not to invest the time and money to calculate adjustments resulting from the accounting method changes. Taking advantage of the relief, however, is not without its consequences. Also, regardless of whether or not taxpayers take advantage of the small taxpayer relief, the TPRs are still in full effect beginning in 2014 and taxpayers must understand and apply the rules going forward.
Breadth of the Tangible Property Regulations
In 2014, the IRS issued implementation guidance on how to change existing accounting methods to comply with the final tangible property regulations — an expansive set of rules governing the capitalization and deduction of costs incurred to acquire, maintain, repair, replace and dispose of tangible property. Because the TPRs are so broad, the expectation was that virtually all taxpayers, regardless of size, would need to file one or more automatic accounting method change requests on Form 3115 if they had any tangible business property, materials and supplies, or repairs and maintenance expenditures (see our February 2014 Tax Alert, IRS Issues Implementation Guidance on Tangible Property Regulations, for more information). The final TPRs must be followed in all tax years beginning on or after January 1, 2014.
When a taxpayer files for a change of accounting method, typically the taxpayer must calculate the cumulative impact of the change on taxable income as of the beginning of the tax year and recognize that change — the "481(a) adjustment" — as income or a deduction. This required taxpayers to review prior year expenditures and evaluate whether items that had been capitalized are immediately deductible under the final TPRs, or vice versa. Even if taxpayers did not have any prior year expenditures that needed to be reclassified, they still had to file certain accounting method changes to adopt new definitions for unit of property or materials and supplies which simply did not exist prior to the issuance of the final TPRs.
In addition to what were effectively mandatory accounting method changes, several optional method changes were available under the implementation guidance, including a one-time opportunity to make a late partial disposition election to write-off portions of assets disposed in prior years (e.g., a roof), and the ability to write-off separately stated assets on the taxpayer's books which had been disposed but were still being depreciated.
Qualifying Small Taxpayer, Defined
For purposes of the relief afforded by Rev. Proc. 2015-20, a qualifying small taxpayer is a taxpayer with one or more separate and distinct trade(s) or business(es) that has:
- Total assets of less than $10 million as of the first day of the 2014 tax year, or
- Average annual gross receipts of $10 million or less for the three prior taxable years (2011–2013).
Small Taxpayer Relief
A qualifying small taxpayer may adopt the TPR-related accounting method changes by taking into account only amounts paid or incurred, or dispositions, in taxable years beginning on or after January 1, 2014. This effectively means that the method changes are applicable on a cut-off basis and no 481(a) adjustment is allowed.
Taxpayers may use the relief provisions to adopt (if applicable) automatic accounting method change numbers 184 – 193, 200, 205 and 206, which most notably includes changes to:
- Deduct amounts paid or incurred for repair and maintenance or a change to capitalize amounts paid or incurred for improvements to tangible property, including a change, if any, in the method of identifying the unit of property, or in the case of a building, identifying the building structure or building systems for the purpose of making this change;
- Deduct non-incidental materials and supplies when used or consumed;
- Deduct incidental materials and supplies when paid or incurred;
- Deduct non-incidental rotable and temporary spare parts when disposed of;
- Capitalize acquisition or production costs;
- Deduct certain costs for investigating or pursuing the acquisition of real property;
- Dispose of a building or structural component; and
- Dispose of tangible depreciable assets (other than a building or its structural components).
A qualifying taxpayer is permitted to make these changes without filing Form 3115 or including a statement in its tax return. Taxpayers may not choose to adopt some of the eligible changes under the relief provisions while adopting others by filing Form 3115.
Implications of the Relief
While Rev. Proc. 2015-20 does reduce the administrative burden of adopting the TPRs on small taxpayers, taking advantage of the relief is not without consequences. Taxpayers choosing to adopt the TPRs under the relief provisions of Rev. Proc. 2015-20:
- Will not receive audit protection for prior years on any TPR-related methods;
- May not make a late partial disposition election;
- May not write off separately stated assets that were replaced prior to the 2014 tax year; and
- May not write off items previously capitalized that would be deductible as repairs under the improvement standards of the final TPRs.
Given that these opportunities for write-offs will be permanently lost, taxpayers should carefully consider whether they can benefit from the write-off opportunities before choosing to adopt the TPRs under the small taxpayer relief provisions. Keep in mind that any eligible taxpayer that does not include in its 2014 tax return a Form 3115 for the TPR-related accounting method changes has effectively chosen to apply the small taxpayer relief provisions, whether intended or not.
What Does This Mean for the TPRs Going Forward?
The impact on compliance with the TPRs in the future is minimal. The TPRs are still in full effect beginning with the 2014 tax year and all taxpayers (regardless of size) with tangible business property, materials and supplies, or repairs and maintenance expenditures must be in compliance with the final rules going forward. Similarly, all of the annual elections, like the de minimis safe harbor election, are still available. Rev. Proc. 2015-20 simply allows small taxpayers to adopt the TPRs without incurring the cost of calculating 481(a) adjustments or preparing Form 3115.
Please contact your local CBIZ MHM tax advisor to discuss opportunities for write-offs under the TPRs and whether you should take advantage of the Rev. Proc. 2015-20 relief provisions.
Copyright © 2015, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).