IRS released Rev. Proc. 2015-20 after it was bombarded with requests for clarification as to when, or if, Federal Form 3115 (Application for Change in Accounting Method) had to be filed with tax returns filed for tax year 2014 when a company modified its accounting methods to comply with the Repair & Capitalization Regulations issued by the IRS in 2013 (T.D. 9636).
This summary will only address the newly issued Rev. Proc. 2015-20. You are strongly encouraged to read BOTH the original regulations and the newly issued Rev. Proc. and make your own conclusions. It is expected that the reader has read and has a basic understanding of the T.D. 9636 (Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property).
The original regulations and Rev. Proc. 2015-20 both define a “small business” for purposes of the “Repair vs. Capitalization Regulations” as “a business with total assets of less than $10 million OR average annual gross receipts of $10 million or less for the prior three taxable years. If a business falls within EITHER of these measurements then the business would be considered a small business. As such, in accordance with the new Rev. Proc., a small business WOULD BE PERMITTED to make certain tangible property changes in methods with an IRC Section 481(a) adjustment that takes into account ONLY amounts paid or incurred, and dispositions in taxable years beginning on or after January 1, 2014. Additionally, for the FIRST taxable year that begins on or after January 1, 2014, the small business is permitted to make certain tangible property changes WITHOUT THE NEED TO FILE A FORM 3115.
This new Rev. Proc. DOES, in fact, make it easier for small businesses, as defined above, to comply with the new Repair Regulations as the need to file Form 3115 is significantly reduced. However, it is important to note that, as stated in Section 2, paragraph .06 of Rev. Proc. 2015-20 some small business taxpayers may choose to file Form 3115 in order to retain a clear record of a change in method of accounting or to make permissible concurrent automatic changes on the same form, the IRS is suggesting that the small business (by taking advantage of this Rev. Proc.) may prefer the ADMINISTRATIVE CONVENIENCE of being able to comply with the final tangible property regulations in their first taxable year that begins on or after January 1, 2014 SOLELY THROUGH THE FILING OF A FEDERAL TAX RETURN. As such, the regulations state that the small business neither needs to file the Form 3115 nor does it need to attach a separate statement to the return. It is important to note, however, that the taxpayer MAY wish to consider filing the Form 3115 for other reasons. You should consider these issues as well when advising a taxpayer.
Taxpayers and tax preparers would be remiss if they did not address Section 2, Paragraph .07 of the Rev. Proc. which specifically states that “if, as provided by this revenue procedure (i.e. Rev. Proc. 2015-20), a taxpayer chooses to make certain tangible property changes in methods of accounting on a federal tax return without filing Form 3115, concurrent automatic changes, other than those specifically addressed in section 5 of this revenue procedure, ARE NOT PERMITTED TO BE MADE WITHOUT COMPLETING A FORM 3115 (EMPHASIS ADDED).
This summary was supposed to try and explain, in a short review, the 16 page Rev. Proc. Clearly this cannot but fully done in two pages but I did want to alert you the major modifications made by the newly released Rev. Proc. It is hoped (and expected) that more information will be forthcoming as not everything is addressed by the Rev. Proc. Personally, I have the following concerns, among others:
1. The regulations, as originally released, and not modified by Rev. Proc. 2015-20, refer to an “Applicable Financial Statement” (“AFS”). Some commentators requested that the definition of an “AFS” be modified to include a REVIEWED financial statement. In the final regulations the IRS did not modify the original definition.
2. While the IRS has defined, for purposes of the relief provisions of Rev. Proc. 2015-20, what a small business is, I do not see any clear indication as to what a taxpayer considers when it is determining if its total assets or total revenue exceed $10 million. My concerns here lie in whether every entity stands alone or are affiliated entities combined for calculation purposes? Also, what about an individual taxpayer with multiple Schedule C’s and/or multiple Schedule E’s?
3. I am also concerned that the de minimis safe harbor expensing threshold as it relates to businesses WITHOUT an “AFS” is really too low. There can be many businesses that are large businesses but do not require the need for an audited financial statement. Why shouldn’t they be permitted to use a $5,000 de minimis safe harbor or provide for a percentage of some number as a de minimis safe harbor e.g. a percentage of gross assets or gross fixed assets or some other threshold amount?
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