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Alert: Tangible property regulations, relief for small taxpayers

February 20, 2015 Article 2 min read
Nathan Buchalski Jonathan Winterkorn
In September 2013, the Internal Revenue Service issued final regulations on tangible property capitalization that are broadly applicable to the vast majority of business taxpayers since they addressed fundamental issues, such as when repair costs could be deducted currently instead of  capitalized.  The rules required all taxpayers to change to policies that are consistent with the regulations and to calculate the cumulative impact that these rules would have on their historical taxable income had they been consistently applied in earlier years.  Taxpayers were required to report this cumulative adjustment to taxable income on Form 3115, Application for Change in Accounting Method. However, this filing was required to make changes even if there was no adjustment to taxable income. 

On February 13, 2015, the IRS issued welcomed relief in the form of simplified procedures for small taxpayers with less than $10 million of assets or $10 million of average annual gross receipts.  This relief allows small taxpayers to apply the regulations prospectively, as of the beginning of their 2014 tax year, which eliminates the need for an adjustment to taxable income for the historical impact of applying the new rules.  The relief also allows small taxpayers to change their methods of accounting without filing Form 3115.  Taxpayers utilizing this relief are still required to change their accounting policies to adopt the regulations beginning with their 2014 tax year.

While this relief is significant from an administrative standpoint, taxpayers should consider several items before using the simplified procedures.  First, taxpayers using the simplified procedures are precluded from using favorable provisions of the regulations to obtain deductions of certain costs that were capitalized in prior years, but could now be deducted.  These costs may include repairs costs that were capitalized but are currently deductible under the new rules.  Some taxpayers also might be eligible to deduct costs that were properly capitalized when incurred, but can now be treated as disposed under the new regulations such as disposing of the original roof of a building after the roof has been fully replaced.  Second, taxpayers facing unfavorable adjustments in prior years are still subject to audit by the IRS with respect to these issues and the IRS may impose adjustments in those earlier years, including interest and penalties.  On the other hand, taxpayers are afforded audit protection on these issues in previous years if they file Form 3115 to change their accounting methods.
We believe that before small taxpayers determine whether they will use the simplified procedures, they should analyze their past transactions and accounting policies to determine if opportunities or exposures exist.  If there are opportunities or exposures, the filing of a Form 3115 may be warranted.  If a taxpayer does not have any significant opportunities or exposures, the use of the simplified procedures would likely simplify the process of complying with the regulations. 

If you have any questions regarding how the simplified procedures affect your company or if we can assist with any other tax planning opportunities, please contact your Plante Moran client services representative or one of the contacts listed to the right.

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