Let’s get this out there first: The IRS had created a crazy situation. They’d changed the rules about how businesses and investors should account for tangible property, including repairs, maintenance, capital improvements, materials and supplies.
And then because they had changed the rules, tax law said taxpayers needed to step through a complicated process to make sure no income or deductions dropped through the cracks during the change when preparing their 2014 tax returns.
Compounding this predicament, many tax accountants procrastinated about dealing with these rules. And over the past few weeks, a contingent of these folks started crying and whining because they had procrastinated and were not ready to deal with the change.
Collectively the tax accountant community was just begging the IRS to cut them and their clients slack.
And so the IRS issued Revenue Procedure 2015-20. And many tax accountants breathed a sigh of relief.
What Revenue Procedure 2015-20 Says
What Revenue Procedure 2015-20 did is simple: It says small businesses don’t have to follow the usual process for implementing an accounting method change.
In other words, if a taxpayer’s total assets equal $10 million or less or its average annual revenues equal $10 million or less, the taxpayer can skip preparing 3115 forms.
That sounds good. Many tax accountants seem to think they’ve dodged a bullet. But this situation is actually only more complicated with the new revenue procedure.
The Tangible Property Regulations Still Apply
A first important point: The new rules, the new tangible property regulations, still apply.
Rev. Proc. 2015 doesn’t give taxpayers or their tax accountants a pass on the new regulations. It gives them a pass on the requirement to file Form 3115.
Many Tax Accountants Poorly Informed
Another odd point about all this: I don’t blame taxpayers for not understanding or yet knowing the new regulations.
But oddly, some tax accountants had convinced themselves that the new rules didn’t mean an accounting method change. This new revenue procedure shows that sort of lazy thinking was wrong, plain and simple.
If you’re a tax accountant and you thought this way? Yikes!
And if you’re a taxpayer and your tax accountant hadn’t been all over this issue, hadn’t talked with you about how the new regulations maybe affected your small business or real estate investments? Well, again, yikes.
Because the new regulations do trigger an accounting method change, tax practitioners and taxpayers can’t simply ignore the stuff that’s baked into the preparation of a form 3115.
Taxpayers and Their Accountants Still Need to Consider Filing 3115s
On to another subject: the possibility that taxpayers and tax accountants still need to consider filing 3115s.
I think this option still needs to be considered for small businesses and investors. You get at least a couple of direct benefits from filing a 3115 and then often one indirect benefit.
One direct benefit taxpayers gain by filing a 3115 is an ability to make Sec. 481 adjustments related to prior years as part of implementing the change. (This could cost the taxpayer money but could also save the taxpayer money.)
Another direct benefit? Taxpayers who follow the formal rules for disclosing accounting method changes gain audit protection. (This means that in an IRS examination, a taxpayer who has followed the formal rules should end in better position.)
The indirect benefit? Well here’s an example: Does any of the stuff mentioned in the preceding paragraphs leave you with questions? I mean, are you clear on how the new regulations work? Do you wonder if that Sec. 481 adjustment thing I just talked about matters in your case? Is that audit protection something that could actually matter in a meaningful way to you?
The indirect benefit to stepping through the process of preparing form 3115 is that taxpayers would have had a way to get answers to these sorts of questions from a tax accountant knowledgeable about the new regulations.
The Way Tax Accountants Should Maybe Think
Can I make a suggestion to any tax accountants reading this?
I think the way you read the revenue procedure is like this: It lets you file a tax return that skips the 3115s without having to include form 8275R.
In other words, you don’t have to include an 8275R to disclose the fact that you haven’t really complied fully with the treasury regulations.
Thinking this way gives you the right sort of handle on the subject.
Furthermore, given this, I think you also need to do the same work you would have done had you prepared 3115s for your clients. In other words, you need to help small businesses and clients get up to speed on the new rules.
How you recover your investment, how you get paid for the work you’ll have to do for clients, is tricky given Revenue Procedure 2015-20. I grant you that.
This trickiness is part of the reason I call this revenue procedure a face punch.
The Way Taxpayers Should Maybe Think
Can I also make a suggestion to any taxpayers reading this?
I think it’s probably very reasonable if your tax accountant wants to prepare 3115s for your tax return. And please remember he or she didn’t create this mess. The IRS did.
As a taxpayer you should view the costs of complying with the new regulations for what it is: a new tax levied on businesses and investors.
But if you don’t want to pay for professional services to deal with this mess—that’s okay too. Just understand that you’ll need to learn the new accounting rules anyway… and you may be leaving money on the table at some point.
A Plug for Our e-Book about the New Regulations
Obviously, most small businesses don’t need to worry about filing 3115 forms for the new TRPs. However, tax accountants aren’t quite as lucky.
If you are a tax accountant and have small business clients who need or want to prepare 3115s for the new TPRs–perhaps to deal with late partial dispositions or to obtain audit protection for their accounting method changes–you will need to file 3115s. In this case, you may interested in our downloadable e-book on the subject.
We’ve prepared a short (60-pages) downloadable e-book which a tax practitioner can probably skim through in less than an hour. The e-book explains how the new regulations change the way small taxpayers need to do their accounting for tangible property deductions. And it describes a straight-forward approach to complying with new regulations with a minimum amount of fuss and handwringing shows completed 3115 forms for the three most common accounting method change requests small taxpayers will need to make… (We’ve also thrown in a sample accounting policy which should help a small taxpayer stay in compliance in the future.)
For $100, you can purchase and immediately download this e-book. Click the button here to make your purchase:
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And an important note: We’re providing a money-back guarantee… if you don’t find our e-book saves you several hours of time and lets you easily prepare 3115s (for which you should be able to charge some multiple of the price you pay for the book) just email use and ask for a refund.
David A. DeDionisio says
Great article Steve…..as I like to say, “pearls of wisdom”…keep it up. Your analysis is direct and very sensible. Thank you and take care.
Sean Kanazawich says
Hi Steve, I stumbled upon your blog this morning, and I am compelled to tell you it has been the most helpful source to me in drudging through the TPR. Like most tax practitioners, we are late to the TPR party. After reading through both of your blog posts that address Rev. Proc. 2015-20 (as well as the related comments sections) I would appreciate your thoughts on the following scenarios:
Scenario #1: A small business taxpayer has historically filed returns in compliance with the old tangible property regulations. Ten years ago, the taxpayer has capitalized a building used in trade or business and treated the building structure and building systems as a single unit of property for the purpose of determining whether to capitalize or expense improvement/repair costs (in other words, treated the building the same way any reasonable human being treated it at the time for small taxpayers). Throughout the last ten years, several improvements were capitalized and depreciated. Under the final TPR, these improvements are still deemed improvements, therefore no section 481(a) adjustment is available. First, my understand has been that in this situation, prior to Rev. Proc. 2015-20, a Form 3115 (code 184) is required to change the method of identifying the building structure or building systems (i.e. from an impermissible to a permissible method of accounting for the building). Is this correct? Second, under Rev. Proc. 2015-20, since there is no Section 481(a) adjustment in this situation, does the act of filing a 2014 return without Form 3115 and without a 481(a) expense caption mean the taxpayer is magically in compliance with the code 184 change? And for that matter, is the taxpayer magically in compliance with all applicable changes (e.g., code 184, 186, 187, 192)?
Scenario #2: Same as #1, except the nature of the old improvements is not easily discerned from the captions on the depreciation schedule, and thus further information is needed from the client to determine whether they would be eligible for a 481(a) adjustment. However, in lieu of asking the client to describe in detail the nature of the old improvements and spending extra time on the client, we opt to forego a section 481(a) adjustment for prior year improvements. Same three questions as Scenario #1. My initial thought is the answers would be unchanged from Scenario #1.
Two other questions as well:
Under Rev. Proc. 2015-20, how would a section 481(a) adjustment be generated if it applies only to amounts paid or incurred on or after January 1, 2014? For example, if I had a transaction in 2014 that under the old regs was an improvement but under the new regs is a repair, wouldn’t that just go to repair expense? Or would this type of thing be the section 481(a) adjustment.
I think I understand how a section 481(a) adjustment could be generated from the materials & supplies changes (for example, incidental materials & supplies were previously held in a prepaid supplies account, so in 2014 the taxpayer chooses to expense incidental materials & supplies when paid, thus generating a section 481(a) adjustment for the beginning balance of prepaid supplies. Is this accurate?
Steve says
You’ve got a lot of detail packed into your scenarios–and really more than I can address in a brief comment. But I think this general statement answers your questions: Revenue Procedure 2015-20 lets you skip the 3115s if you don’t need to do a Sec. 481 adjustment… but you still need to make sure the taxpayer changes their accounting methods to conform to the new TPRs.
Regarding your other two questions, I think you do in a sense have an adjustment that stems from your accounting method change… I guess. But you’re not going back into previous years and need to fix stuff there. So assuming Revenue Procedure 2015-20 gives you permission to skip the 3115s, you should do that. (In the last two examples you give, BTW, I don’t think if you were preparing a 3115 that you’d even put the adjustment on the 3115 as a Sec. 481 value.)
suhas shah says
Is your e book updated for revenue procedure 2015-20? If so where. I just bought the book but did not see anything related to rev Proc 2015-20
Steve says
The book is updated… E.g., there’s a section that uses the label Rev Proc 2015-20… take another peek.
Laura Padgett says
Steve,
I purchased the ebook a week before the 2015-20 was issued. How do I get access to the updated ebook?
Steve says
Sorry Laura, I tried to send out an email to everybody with a link you could use to download the updated copy. What happened in a number of cases, though, is that people used a different email address for their PayPal account than they really “use” on a daily basis.
I have just sent you another email with a link you can use. Sorry for the lag.
Cheryl Lombardi says
A quck question if i am filing a 3115 for audit protection, these are mostly clients that have rental properties where i don’t feel there is a 481 adjustment. Am I correct that I can file one 3115 for all properties by listing their addressing within the form? Also I am getting conflicting info on the dates to use, if we are doing this for audit protection for open years is the date on the form still 2014 for should all open years be included as well?
Most importantly does the E book give an example of how to complete this form with no 481 adjustment for filing the form for audit protection? If so I will download it and pay for it and love the blog post by the way very informative!!
Steve says
You would probably actually file a set of 3115s for a taxpayer. So if a taxpayer files a 1040 with seven rental properties, you would probably prepare one set of 3115s for the return. I think this answers your question.
BTW, if you don’t have any Sec. 481 adjustment–not even for late partial dispositions–then you probably don’t need to file the 3115s.
Cheryl Lombardi says
Steve,
It is my understanding that if you don’t file the 3115 even if you don’t have any 481 adjustments then in a audit you have no protection, therefore you could lose a deduction if it was classifed incorrectly. The only reason I would file these is for that reason, audit protection only. And I am still somewhat confused on the partial disposition, would this pertain say if someone had damage to a foundation, repaired it so then the existing portion that was already on depreciation would have to be removed? Sorry I am still confused on this does the E book cover this?