Recently the IRS released a new revenue procedure (Rev Proc 2015-20) that gives small business taxpayers the option of making changes to comply with the tangible property regulations on the federal tax return without including a separate Form 3115 (Application for Change in Accounting Method) or separate statement.
Under this new revenue procedure, businesses that have either:
- total assets of less than $10 million as of the first day of the taxable year beginning on or after January 1, 2014, or
- average annual gross receipts of $10 million or less for the prior three taxable years,
are permitted to make changes in methods of accounting under the new regulations that take into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014.
This means that small business taxpayers can make changes to comply with the tangible property regulations without filing a Form 3115. Businesses that do not qualify as small taxpayers, who are otherwise required to comply with the regulations, will still be required to file the 3115 to indicate their compliance.
Easier is not always better
The revenue procedure was adopted “to further ease the administrative burden faced by small business taxpayers in prospectively applying the final tangible property regulations.” Further, the procedure indicates that “While some small business taxpayers may choose to file a Form 3115 in order to retain a clear record of a change in method of accounting… other small business taxpayers may prefer the administrative convenience of being able to comply with the final tangible property regulations in their first taxable year that begins on or after January 1, 2014, solely through the filing of a federal tax return.”
Despite the issuance of this revenue procedure, small business taxpayers who qualify may still find it in their best interest to file the 3115. In comparison to the taxpayers who take the IRS up on their offer of convenience, 3115 filers may gain up to four advantages:
1. Clear records
The filing of the 3115 creates a clear record of compliance with the regulations, which may be beneficial in the event of IRS examination.
2. Adjustment to 2014 taxable income
If, by applying the regulations to prior years, the taxpayer is able to generate an adjustment (i.e., “481(a) adjustment”) that decreases their 2014 taxable income, it may be best to file the form regardless of their small taxpayer status.
3. Audit protection
The revenue procedure indicates that taxpayers who do not file the 3115 will not receive the audit protection afforded under section 8.01 of Revenue Procedure 2015-13 for taxable years beginning prior to January 1, 2014. If you have audit protection under Revenue Procedure 2015-13, the IRS will not require the taxpayer to change its method of accounting for the same item for a taxable year prior to the requested year of change.
4. Strategic tax position
Small taxpayers choosing to take this new approach afforded under Revenue Procedure 2015-20 are not permitted to apply certain parts of the regulations retroactively, and others prospectively. For example, a small taxpayer who makes a tangible property disposition change only taking into account items from 2014 forward would not be permitted to make the late partial disposition election and apply it to years beginning prior to January 1, 2014. The late partial disposition election is a tax-advantaged opportunity that exists only for the 2014 tax year.
Further IRS adjustment possible
The revenue procedure also indicates that the IRS is considering adjusting the De Minimis Safe Harbor threshold for taxpayers without an applicable financial statement. The current threshold for those taxpayers is $500. The revenue procedure requests comments on whether it is appropriate to increase the De Minimis Safe Harbor threshold for taxpayers without an applicable financial statement to an amount greater than $500.
The tax professionals at Clark Schaefer Hackett will continue to monitor this issue and keep you in the know as new information is released. To discuss your approach to tangible property regulation compliance, please reach out to your CSH advisor, or request a consultation.
To further understand this topic, view our recorded webinar on tangible property regulations, or read a case study of a large business client whose compliance approach was strategically structured to reduce their tax burden.
Further resources for understanding the final tangible property regulations: