On February 13, 2015, the Internal Revenue Service (IRS) released Revenue Procedure (“Rev. Proc.”) 2015-20, which amends the list of automatic accounting method changes that was published earlier this year (see Rev. Proc. 2015-13 and Rev. Proc. 2015-14) to relieve some of the burdens that might fall on small business taxpayers trying to comply with the final repair regulations that were published last year. The guidance also requested comments on whether the de minimis safe harbor contained in Treas. Reg. Section 1.263(a)-1(f)(1)(ii)(D) should be increased from $500 for expenditures on personal property that can be deducted instead of being capitalized.
Small business taxpayers are defined as businesses with total assets of $10 million or less or average annual gross receipts of $10 million or less for the prior three taxable years, which are applied to each separate and distinct trade or business of the taxpayer (i.e., no aggregating the total assets or gross receipts of each separate distinct trade or business).
For the first tax year beginning on or after January 1, 2014, small business taxpayers may make changes to their method of accounting for tangible property without filing Form 3115, Application for Change in Accounting Method. In addition, small business taxpayers may implement method changes to tangible property using a cut-off method for their Section 481(a) adjustment that only considers amounts paid or incurred and/or dispositions that occurred on or after January 1, 2014. Under Rev. Proc. 2015-20, this is considered initiating the process and is deemed to be a change in method of accounting while the taxpayer’s former method of account remains in effect before the year of change.
Although this obviously lessens the administrative burden for taxpayers qualifying under Rev. Proc. 2015-20, taxpayers need to understand that they may be foregoing significant opportunities for additional deductions in connection with the various method changes not included under this Rev. Proc. (e.g., removal costs and/or impermissible to permissible depreciation). Additionally, taxpayers cannot qualify for the prior year partial asset disposition method change, as it is not allowed under Rev. Proc. 2015-20, and further, taxpayers will not have audit protection for their tangible property regulation transactions in prior years due to the non-filing of the change of accounting method.
As such, employing Rev. Proc. 2015-20 enables the IRS to make audit adjustments for tax years prior to 2014, and consequently, a taxpayer would be subject to the “use-it or lose-it” rules for prior year repair and maintenance items [i.e., no four-year spread for unfavorable (positive) adjustments or immediate deduction in current year for favorable (negative) adjustments].
Accordingly, taxpayers have to weigh the benefit of less administrative burden against additional deductions and audit protection. Even if the taxpayer adopts the provisions under Rev. Proc. 2015-20, they are still going to have to implement the tangible property regulations from a prospective basis, which gives them an understanding on how they align with the new regulations from a historical basis. The bottom line is that if the taxpayer could benefit from filing a method change (e.g., removal costs, partial asset dispositions, etc.), they should file the change of accounting method and receive the audit protection for prior years.
The relief that small business taxpayers sought came on Friday, February 13, 2015; however, small business taxpayers qualifying under Rev. Proc. 2015-20 should think long and hard on what they may be giving up for this administrative ease.
TECHNICAL INFORMATION CONTACT:
John M. Belpedio