I can’t believe it. I really can’t.
After years of fiddling-faddling with the regulations for tangible property accounting—including lengthy discussions with taxpayers and tax practitioners—the IRS today issued Revenue Procedure 2015-20 (click here to download a copy.)
If You Give a Mouse a Cookie
In a nutshell? Halfway through tax season, due to lots of complaining from tax return preparers, the IRS has changed the rules about the need to file a 3115 form as part of complying with the new tangible property expenditure accounting.
Up until yesterday? You needed to file the form in order to tell the IRS that, yes, you would comply with their new rules… that yes, you would politely ask for permission to make this change they’d decided you needed to make.
The good news was you automatically got their consent to make the change you were supposed to make because they’d changed the rules.
Rev Proc 2015-20 Changes Things
Here are the new rules in a nutshell:
1. If you’re a small business taxpayer (which means your average annual revenues equal $10 million dollars or less or your total assets at the start of the year equal $10 million dollars or less), you don’t have to comply with the requirement to prepare and file the 3115 form as part of changing your accounting to comply with the new rules.
2. If you want to, you can just expense any small items that have less than a one-year useful life or which cost $500 or less. (The old rule set this threshold to $200 or required a formal accounting policy to use the higher $500 limit.)
3. The rules are subject to further last-minute change. For example, the revenue procedure notes that the IRS wants more feedback from people about maybe changing again the de minimis safe harbor rule. (The IRS has asked in Revenue Procedure 2015-20 for people to provide their comments about the de minimis safe harbor by April 21, 2015.)
Sec. 481 Adjustment Still Required—Apparently
One important note about this flip-flopping: As makes sense, taxpayers still are required to address any required Sec. 481 adjustments. But this gets tricky.
A Sec. 481 adjustment means you’ve calculated any catch-up or fine-tuning adjustment that’s needed to make sure income and deductions aren’t omitted or double-counted as a result of changing your accounting and beginning to use the new tangible property regulations.
But here’s the odd thing about the Sec. 481 adjustment the taxpayer makes if the 3115 form isn’t filed: You only look at stuff that occurs after January 1, 2014. You ignore stuff that occurs before that date.
By the way? Because you’re ignoring stuff that could and should play into a Sec. 481 adjustment if it happens before the 2014 tax year, you don’t get any audit protection with a “look Ma, no 3115 forms!” approach.
Further, you can’t do a late partial disposition (which would let a taxpayer immediately expense stuff in 2014 that per the TPRs they should have expensed at some point in the past.)
You Can Still Use TPR Rules
By the way, you can still do a 3115 form according to the tangible property regulations (TPR) rules in force yesterday. The IRS, ever helpful and adroit in its administration of tax laws, notes that some taxpayers may actually find the process of completing the 3115 form helpful with the taxpayers own internal accounting and calculations.
I also think–and this wasn’t my first reaction–that given the audit protection angle and the different Sec. 481 adjustment–some taxpayers may still want to prepare and file 3115s.
The other thing to note about not filing 3115s–and this relates to the cut-off approach used to handle the Sec. 481 adjustment–you can’t per the revenue procedure do a late partial disposition adjustment if you skip the 3115s. (This is big deal and something I’ll post about on February 16 or February 17.)
Apparently You Can Still Use the Pre-TPR Rules Too?
If you read the revenue procedure, you almost come away with another conclusion, too.
Apparently the TPRs weren’t ever quite as definitive as some of us thought.
For example, consider the subject of the de minimis safe harbor that seemed–at least a day ago–like a definitive rule. Here’s a quote from page 8 of the new revenue procedure:
The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible. Consistent with longstanding law, a taxpayer may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amount. In addition, the existence of the de minimis safe harbor does not mean that a taxpayer cannot establish a de minimis deduction threshold in excess of the safe harbor amount, provided the taxpayer can demonstrate that a higher threshold clearly reflects the taxpayer’s income. In conjunction with section 179, which also allows small business taxpayers to immediately expense certain otherwise capital expenditures, the de minimis safe harbor provides significant tax simplification to small businesses.
I am not sure how you process this if you’re a taxpayer or tax practitioner. It almost sounds like there never really was a hard and fast de minimis limit.
At least we all have time to process and figure out what this means. Oh, wait, we don’t? Never mind.
If You’ve Already Filed 3115s
Here are a handful of suggestions if you’re a taxpayer or tax practitioner dealing with this mess:
1. If you’ve already filed 3115s, don’t worry about it. You were complying with the law. Further you get better Sec. 481 adjustments and better audit protection from your 3115s. (By the way, per Revenue Procedure 2015-20, you can amend a 2014 tax return and remove the 3115 forms you previously filed.)
2. If you’ve already prepared 3115s, I think you file them. Again, there’s the better Sec. 481 adjustments and better audit protection benefits. And for those returns already in process of getting filed–say the 8879s are out for signature–I don’t think you add more work by now stripping out the forms.
3. If you would benefit from a full-fledged Sec. 481 adjustment–say for a late partial disposition–you should do a 3115. I would say this even if you think you could use the slap-dash Sec. 481 adjustment cut-off method and ignore pre-2014 amounts. Why not do the Sec. 481 adjustment correctly?
4. If you have a taxpayer with a return that requires other 3115s you have to file anyway, you need to use a full set of 3115s for all the accounting method changes. By the way, this didn’t dawn on me in the first hours of processing the new revenue procedure. But it’s clear to me now that if you need to do a 3115 for something like a late partial disposition or some other accounting method change that triggers a real Sec. 481 adjustment, you need to do all the other 3115s the original regulations require too.
Two Closing Comments
Personally? I don’t want to vent at this blog. Oh, sure, it’s okay if you want to post a comment that vents a bit. Nothing vulgar please. Respect other people’s viewpoints. But I try to make this all about the “how-to.”
However, that said, let me share two personal-opinion-type comments:
First, the Internal Revenue Service displayed a series of really poor judgments in drafting and implementing these new regulations. And the tax practitioner community just got beat up in the process.
Second, one of the justifications for the new TPRs was to get away from these fuzzy rules people have used for tangible property. We now have even more fuzziness. And not just about the way the accounting is supposed to work. We now know that tax laws may change mid-season.
P.S. I’ve got some additional comments about this mess here: Revenue Procedure 2015-20 a Face Punch for Tax Accountants.