On the afternoon of Friday, February 13, 2015, the Internal Revenue Service (“IRS”) made it easier for small business owners to comply with the final tangible property “repair” regulations (“Regulations”). Revenue Procedure 2015-20 allows small businesses to change a method of accounting under the Regulations on a prospective basis for the first taxable year beginning on or after January 1, 2014.
This modification means that, effectively, small business taxpayers making these specific changes in methods of accounting in the Regulations for the first tax year that begins on or after January 1, 2014, may elect to make the change on a cut-off basis, with any Section 481(a) adjustment only taking into account amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014, the effective date of the Regulations. Generally, this means that small businesses properly applying the Regulations in 2014 and electing these simplified procedures should have no Section 481(a) adjustments.
Also, the IRS is waiving the requirement to complete and file a Form 3115, Application for Change in Accounting Method, for small business taxpayers that choose to use this simplified procedure for 2014.
Revenue Procedure 2015-20 defines a “small business taxpayer” as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years. These tests are applied to each separate and distinct trade or business of the taxpayer.
These changes drastically will reduce 2014 income tax compliance efforts and costs for small business taxpayers. Nevertheless, there may be some times that filing a Form 3115 may be beneficial. For example, the Regulations allow taxpayers to write off parts of buildings that have had significant improvements installed in prior years, in a situation generally referred to as a “late partial disposition election,” but only if the taxpayer files a Form 3115 in the year of the change in accounting method.
We will be discussing the Regulations with our clients owning businesses and rental activities, both small and large. Please contact your HM&M tax advisor with questions.