Form 3115 Relief Is Here for some Small Businesses

On Friday, February, 13 the IRS released Rev. Proc. 2015-20 which will make it easier for small business owners to comply with the final tangible property regulations. This new simplified procedure allows small businesses to change their method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after January 1, 2014. The IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014. The new simplified procedure is generally available to small businesses with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less for the prior three taxable years.

This relief will allow a small business to comply with the final tangible property regulations solely through the filing of a federal tax return. However, a Change in Accounting Method that would result in an increase or a decrease in income (a code section 481(a) adjustment) will still require a Form 3115. For qualifying small business taxpayers, we believe this will be the only reason to file a form 3115. If a Form 3115 is filed and a 481(a) adjustment is made, all the repair regulations must be applied retroactively. Some of the more common reasons for filing a form 3115 with a 481(a) adjustment will be:

• Method of deducting repairs and maintenance costs
• Capitalizing improvements
• Unit of property
• Capitalizing acquisition or production costs
• Impermissible to permissible method of accounting for depreciation or amortization
• Deducting removal costs
• Late partial asset disposition
• Whole asset disposition (Building)
• Whole asset disposition (Unit of Property)

This latest notice also did not make any change to the seven optional annual elections (elections are not method changes) in the earlier repair regulations. These elections are:

• Materials and Supplies, election to capitalize
• De minimis safe harbor election
• Safe harbor for small taxpayers
• Election to capitalize repair and maintenance costs
• Disposition of a portion of an asset
• Election to Capitalize Rotable, Temporary or Standby Emergency Parts
• Election to Capitalize Employee Compensation or Overhead

These regulations still require additional analysis of each business entity to properly prepare the 2014 Federal income tax return. Each entity might need to file one (or multiple) Forms 3115, calculate a 481(a) adjustment or if it is advantageous, make one of the annual elections allowed by these regulations. Over the last year we have invested significant resources gaining knowledge about these regulations to help comply with these new regulations.