Recently a US Treasury Department official suggested that all businesses should file Form 3115 (Application for Change in Accounting Method) to indicate their compliance with the new tangible property regulations. This filing can be made in the 2013 or 2014 tax year.
The final version of the tangible property regulations (a.k.a. “repair regulations”) was issued in September, 2013. These regulations clarify the distinction between an expense that can be deducted in the current year and one that must be capitalized, thereby spreading the deduction out over several years. The regulations became effective January 1, 2014; however, taxpayers have the option of early-adopting the regulations and applying them to the 2012 or 2013 tax years. For many parts of the regulations, a taxpayer must file Form 3115 to change their accounting method from one that is not compliant with the new regulations to one that is compliant. Typically this change will result in a positive or negative adjustment (i.e. “481(a) adjustment”) to the taxpayer’s income for the year in which the change is made.
The regulations that were issued in September did not address whether a taxpayer who is already in compliance with the new regulations would have to file the Form 3115. In addition, the transition guidance (Rev. Proc. 2014-16) that was recently released on January 24, 2014 also did not address this issue.
On Monday, February 10, 2014, a US Treasury Department official indicated that businesses should file Form 3115 to indicate their compliance with the new regulations, even if they are already operating in compliance with the regulations. Thus, it is possible that taxpayers could file Form 3115 with a zero 481(a) adjustment, indicating that there is no negative or positive impact on that taxpayer’s income for that tax year. What this means for taxpayers is that they should consider filing these 3115s proactively, even if they are already acting in compliance with the regulations. For those taxpayers that choose to early-adopt the regulations for the 2013 tax year, Form 3115 could be filed along with the 2013 tax return. For those taxpayers who adopt the regulations for the 2014 tax year (remember that compliance is mandatory as of January 1, 2014) the 3115 would be filed along with the 2014 tax return.
Further guidance is expected to be released on February 24th which will give more detail as to the format of the 3115s. Clark Schaefer Hackett will keep you updated with any further developments in this regard. Please feel free to reach out to your advisor, or any CSH professional, with any questions.
You may want to know more about the various ways that CSH can support your tangible property compliance. For instance, we can create a compliance plan that positions your business for tax efficiency while minimizing your staff’s time and effort in addressing the changes. Called a Fixed Asset Review, this personalized report will explain the exact steps to take to implement compliance with the tangible property regulations to your advantage, based on your specific circumstances.