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:
Money Back Guarantee
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.