Certain Small Businesses Get Repair Regulation Filing Relief

Since the tangible property regulations were released in proposed form several years ago, Eide Bailly and many other accounting groups, including the AICPA, have been requesting relief from the IRS and U.S. Treasury regarding the administrative burden of adopting the new regulations. On February 13, 2015, the IRS released Revenue Procedure 2015-20 providing delayed, but welcomed, relief to certain small business taxpayers facing the burden of filing an Application for Change in Accounting Method Form 3115 to adopt the new tangible property regulations for repair and maintenance costs, as well as asset dispositions, with their 2014 tax returns.

Procedure Details

Under the Procedure, qualifying small business taxpayers may adopt the new repair and asset disposition regulations beginning with their tax year 2014 tax returns without filing a Form 3115, without attaching a statement to their 2014 return and without making any adjustments to prior year costs. Small business taxpayers qualifying for relief include trades or businesses with either assets less than $10 million or average annual gross receipts less than $10 million for the prior three years.

The Procedure only impacts the administrative actions that small business taxpayers can take in adopting the regulations. It does not change the analytic steps required to be performed by these taxpayers to determine the impact of the tangible property regulations on their prior accounting practices, nor does it reduce the time required to identify the risks or benefits arising from adoption of the new rules.

Some Risk Involved

At first glance, the guidance issued seems taxpayer friendly, but qualifying small business taxpayers should carefully weigh the risks and benefits of adopting the tangible property regulations without a Form 3115 before deciding whether it is better to follow the new Procedure or just file a Form 3115 with their 2014 tax return. The advantages of filing the Form 3115 include: 

• Taking advantage of the opportunity to make an adjustment to prior year costs for either repairs or dispositions through a Section 481(a) adjustment. A Section 481(a) adjustment is made to change the tax treatment of selected prior year costs and may be made to the tax benefit of taxpayers.

• The new Procedure also penalizes these small business taxpayers that adopt the new tangible property regulations without filing a Form 3115 by not providing audit protection for their treatment of prior year repair or disposition costs. 

Comments Sought on De Minimis Safe Harbor

The tangible property repair regulations contain a de minimis safe harbor for taxpayers that do not have an applicable financial statement, typically evidenced by an audited financial statement. The de minimis safe harbor allows taxpayers to deduct costs below a specified dollar threshold without analyzing the costs under the standards in the repair regulations. The Procedure announced that the IRS is accepting comments regarding whether the de minimis safe harbor for taxpayers without an applicable financial statement should be raised above the now allowable $500 level. If there is a change, we would expect it would be prospective and not impact returns filed for calendar year 2014. 

If you have questions on this or any previously released IRS guidance, or would like for us to contact the IRS with a comment you have related to the de minimis safe harbor discussion, contact your Eide Bailly professional or visit our website.