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IR-2015-29: IRS Makes it Easier for Small Businesses to Apply Repair Regulations to 2014 and Future Years

HV Ken

By HV Ken
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rfassett

rfassett

Posted
Posted

Well - my wife has told me for years that it pays to whine - I guess she is right!  I haven't had time to study it yet, but it might be just what we will looking for.

 

I just saw this on another discussion board.

 

IRS Makes it Easier for Small Businesses to Apply Repair Regulations to 2014 and Future Years

 

IR-2015-29, Feb. 13, 2015

 

WASHINGTON —The Internal Revenue Service today made it easier for small business owners to comply with the final tangible property regulations.

 

 

 

Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

 

 

 

Also, 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.

 

 

 

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

 

 

 

The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. Details are in Revenue Procedure 2015-20, posted today on IRS.gov.

 

 

 

The revenue procedure also requests comment on whether the $500 safe-harbor threshold should be raised for businesses that choose to deduct, rather than capitalize, certain capital expenses. 

  • Like 1
rfassett

rfassett

Posted
Posted

.06 While some small business taxpayers may choose to file a 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, other small business taxpayers 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. Accordingly, for the first taxable year that begins on or after January 1, 2014, small business taxpayers that choose to prospectively apply the tangible property regulations to amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014, have the option of making certain tangible property changes in method of accounting on the federal tax return without including a separate Form 3115 or separate statement.

  • Like 4
jklcpa

jklcpa

Posted
Posted

Ok, I'm a little groggy today, so forgive the repeat question about mechanics.

 

If we apply the new rules prospectively starting with 1/1/14 that means there is no scrubbing of the fixed asset schedule and no 481(a) adjustment claimed for any of that on the return.  Start to apply the rules in 2014 and file the returns with the usual forms, right?

 

If we want to scrub and have a 481(a) adjustment for that or other things because we are applying the law retro, we still need to file the 3115, right?  

 

I love the part about "administrative convenience".  Truly if ever there was a statement that proved how the lawmakers are not in touch with reality, that is it!  Ain't nobody got time for that.

  • Like 3
jklcpa

jklcpa

Posted
Posted

Hmm, there's some little nasty component to this simplification in sec .08 that says if you don't apply the law retro to periods prior to 1/1/14, there's no audit protection as described in sec 8 of rev proc 2015-13. 

  • Like 1
Lee B

Lee B

Posted
Posted

Everyone will still need to review their clients repair/capitalization decisions for the past 3 to 5 years in order to see if a 3115

 

may be needed to bring their clients into compliance, reduce their audit risk and pay the 481 (a) adjustment over 4 years

 

without penalties and interest.

Terry D EA

Terry D EA

Posted
Posted (edited)

Ok, I'm a little groggy today, so forgive the repeat question about mechanics.

 

If we apply the new rules prospectively starting with 1/1/14 that means there is no scrubbing of the fixed asset schedule and no 481(a) adjustment claimed for any of that on the return.  Start to apply the rules in 2014 and file the returns with the usual forms, right?

 

If we want to scrub and have a 481(a) adjustment for that or other things because we are applying the law retro, we still need to file the 3115, right?  

 

I love the part about "administrative convenience".  Truly if ever there was a statement that proved how the lawmakers are not in touch with reality, that is it!  Ain't nobody got time for that.

Judy you are correct with applying the new rules beginning 1/1/14 and no 481 adjustment or 3115 is needed. As I read this article, I agree that for prior years back to 2012 the 481 adjustment and 3115 is required. I have three major rental property clients. Two are partnerships and one of the partners invests individually. These folks brought me on board from the onset of these businesses and with the new regs, repair expense vs capitalization is the issue I am fairly comfortable with the procedures we have in place and have maintained consistency. I am understanding the regs apply to "materials and supplies" and not to such assets as a roof replacement or replacement of a HVAC unit that can be depreciated as usual and don't fall under the de minimis safe harbor limitations. At the time of purchase some of these properties were in need of serious repairs to get them ready to rent. I always add those expenses to the building basis as they will normally add to the value of the property. Some of my confusion comes in with determining the useful life of an asset. I am working on one new client this year that a toilet was depreciated for 27.5 years. Under the new rules a toilet that costs less than 500.00 of no AFS is present would be expensed correct? This client began rental activities in 2013 and may be one that I choose to scrub.

 

Oh yeah, I seen that little blurb regarding no audit protection under paragraph 8. There appears to be some leniency built into these regs as well especially the exceptions as long as the policies reflect income.

Edited by Terry D
  • Like 1
jklcpa

jklcpa

Posted
Posted

Terry, I agree with most of that, but the regs do apply to that roof and the toilet. 

 

If the taxpayer elects the de minimis rules and we remember to include the election annually, then expense the repairs under $500 and supplies under $200.  For repairs over that limit, we have to consider whether they meet the new definitions for betterments, adaptations, or restorations. If it's truly a repair to replace on leaking faucet with another, then it still would be a repair.  If that new faucet is a betterment with a sensor that makes it hands-free that controls the flow of water, then that would have to be capitalized if over $500.

 

Interesting that you brought up a toilet. The new regs also detail out what it defines are the 9 areas of building components:  HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distrib, and then other structural components.  Those all include the related piping, ducts, switches, etc that are integral to the systems. Plumbing includes pipes, drains, values, sinks, bathtubs, toilets, water and sanitary sewer collection equip, site utility equip used to distribute water and waste to and from property line to building and other permanent structions.

 

It looks like that toilet is considered "building" not personal property eligible for shorter life.

So for a semi-rant:  We should hope the toilet is less than $500.  One set of materials suggested that taxpayers have installers break out the delivery and installation costs into other invoices separate from the item itself so that each invoice is less than $500.  Seriously, who has time for that, and what business owner will remember that 2 minutes after we have that stupid conversation?  Second rant, seriously, why didn't the IRS make the de minimim thresholds part of the law without us having to make an election each year. Stupid time-wasters.

  • Like 3
Lion EA

Lion EA

Posted
Posted

A toilet can be a very small part of the whole plumbing system, especially if there are multiple toilets in the building, so might be a repair.  Go through your decision tree type thinking.

 

If 2013 was the first year for rentals, you might want to amend 2013 to use the new repair regs which were optional for 2013 returns.  Since you're familiar with their returns, that might be easier than 3115s.  I like the new simplified method for most of my small businesses, but for rentals...I don't know yet.

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