IRS issues small taxpayer relief under the tangible property regulations
TAX ALERT |
On Feb. 13, 2015, the IRS released Rev. Proc. 2015-20 (the guidance). The guidance alleviates the need for certain taxpayers to file one or more Forms 3115 to implement the tangible property regulations. Specifically, taxpayers meeting the definition of a “small business taxpayer” are generally exempt from filing one or more Forms 3115 to adopt the regulations. Instead, such taxpayers may simply implement the regulations on their 2014 tax returns without filing any Forms 3115. This provides welcome relief to small business taxpayers that may not have the resources or records to analyze prior year treatment and prepare the necessary Forms 3115. However, taxpayers that choose not to file one or more Forms 3115 will not be provided with audit protection for prior year treatment. Thus, affected small business taxpayers should take time to determine whether proceeding with the filing of one or more Forms 3115 would be beneficial to their operations.
While the guidance alleviates the need to file one or more Forms 3115 in certain circumstances, it does not eliminate responsibility to ensure compliance with the regulations. Additionally, taxpayers falling outside of the definition of a small business taxpayer still need to file the necessary Form(s) 3115 to implement the regulations (including calculating section 481(a) adjustments as applicable). Taxpayers should continue to work with their tax advisors to determine the most beneficial method of implementing the tangible property regulations for their 2014 tax years. Below is a list of questions and answers to assist taxpayers in understanding the impact of the guidance.
Frequently asked questions:
Q – Who can take advantage of the guidance?
A – The guidance applies to taxpayers with total assets of less than $10 million OR average annual gross receipts of $10 million or less for the prior three tax years. The tests are applied at the trade or business level. For example, a C corporation holding company with two single-member limited liability companies (LLCs) applies the tests at the single-member LLC level.
Q – When does the guidance apply?
A – The guidance applies for the taxpayer’s first tax year beginning on or after Jan. 1, 2014. To the extent a taxpayer does not implement the tangible property regulations in the first table year beginning on or after Jan. 1, 2014, it cannot take advantage of the guidance and instead must file one or more Forms 3115 to implement the tangible property regulations.
Q – Can qualifying small business taxpayers pick and choose which accounting method changes to implement under the guidance?
A – No, if a taxpayer adopts the regulations under the guidance it must adopt all portions of the regulations through the guidance. For instance, a taxpayer cannot adopt the improvement standards through the guidance while separately filing a Form 3115 to recognize prior-year dispositions, including prior-year partial dispositions. Therefore, taxpayers adopting the regulations under the guidance relinquish the ability to make the late election to recognize one or more partial dispositions.
Q – What if a qualifying small business taxpayer does nothing and later decides that it wants to make certain advantageous method changes under the tangible property regulations (e.g., whole dispositions, prior expenditures that would qualify for the routine maintenance safe harbor, reclassifying prior improvement costs as repair costs, etc.)?
A – Because the guidance does not require any affirmative statements in lieu of a Form 3115, if a taxpayer chooses to do nothing, it may be deemed to have applied the guidance. In this case, the taxpayer will be precluded from filing a future Form 3115 to reclassify prior-year costs or recognize prior-year dispositions. Thus, it is imperative that taxpayers work with their tax advisors to determine the most appropriate and optimal way to implement the regulations for the first tax year beginning in 2014.
Q – If a qualifying small business taxpayer has a Form 3115 already completed, can it still file the form? What about qualifying small business taxpayers that have already filed a Form 3115?
A – Qualifying small business taxpayers can still implement the tangible property regulations with a Form 3115. If it is expedient to file the form, even if the section 481(a) adjustment is zero, taxpayers can continue to file the federal tax return with Form 3115 as planned. To the extent a taxpayer has already filed its tax return and included a Form 3115, the taxpayer also has the option of filing an amended federal tax return using the guidance. The amended federal tax return must be filed on or before the due date of the federal tax return for the first tax year beginning on or after Jan.1, 2014, including extensions.
Q – Do qualifying small business taxpayers still get audit protection if they utilize the guidance?
A – If a taxpayer implements the tangible property regulations under the guidance, it will not obtain audit protection for prior years. Generally, when a taxpayer files an accounting method change, the IRS cannot implement a change to the same item in a year prior to the year of change, effectively eliminating any adjustments the IRS could assert on that item. Thus, qualifying small business taxpayers that wish to obtain audit protection for prior-year treatment should consider filing one or more Forms 3115 and calculating and recognizing any required section 481(a) adjustment rather than utilizing the guidance to adopt the tangible property regulations.
Q – Why did the IRS publish the guidance?
A – The IRS recognized the administrative burdens of qualifying small business taxpayers having to complete the Form 3115 as a formality, especially for taxpayers with a low likelihood of past noncompliance and no significant section 481(a) adjustments. This guidance only waives filing of Form 3115 and calculating the section 481(a) adjustment. Absent this guidance, most taxpayers that have tangible property would need to file one or more Forms 3115.
Q – Does this guidance mean that qualifying small business taxpayers no longer have to file any Forms 3115 to make accounting method changes?
A – No, the guidance provides a special exception to the general requirement that a Form 3115 must be filed to implement a change in accounting method. This exception applies only to adoption of the tangible property regulations. Issuance of the guidance does not mean that adopting the tangible property regulations is not a method of accounting. In fact, the guidance clearly provides that absent this limited relief, taxpayers would have to file one or more Forms 3115 to implement the tangible property regulations. Additionally, all taxpayers that need or want to make one or more accounting method changes for items outside of the tangible property regulations must still request such method change(s) through a Form 3115.
Q – Do qualifying small business taxpayers still have to do anything with the tangible property regulations now that this guidance has been issued?
A – The guidance allows qualifying small business taxpayers to focus on implementation of the tangible property regulations without having to contend with the administrative burdens of preparing one or more Forms 3115. While the guidance alleviates the need to file Form 3115 in certain circumstances, it does not eliminate the need to ensure compliance with the rules and proper implementation going forward. Additionally, as discussed above, implementation of the regulations under the guidance will preclude audit protection as well as the calculation and recognition of a section 481(a) adjustment for amounts incurred in tax years beginning prior to 2014. Thus, taxpayers that may benefit from audit protection and/or from a section 481(a) adjustment should take time to determine whether implementing the regulations through one or more Forms 3115 is more beneficial than utilizing the guidance.
Q – I read something about the IRS increasing the de minimis threshold for taxpayers without an applicable financial statement (AFS). Is that true?
A – As part of the guidance, the Treasury Department and the IRS have requested written comments by April 21, 2015, on whether it is appropriate to increase the de minimis safe harbor limit provided in Reg. section 1.263(a)-1(f)(1)(ii)(D) for a taxpayer without an AFS to an amount greater than $500. Comments were also requested on the amount that should be used and the justification for such amount. To the extent the IRS increases the de minimis threshold limit for non-AFS taxpayers, it will most likely apply prospectively.