Final Fixed Asset Regulations: Need for Change of Accounting Method for Most Taxpayers During the 2014 Filing Season
As mentioned in prior Marcum Tax Flashes and the 2014 Year End Guide, in September of 2013, the IRS released final Tangible Property Regulations (TPR.) These regulations were about ten years in the making and will generally require all taxpayers with depreciable property to comply no later than the due date of the 2014 tax returns. The new compliance will require changes to taxpayer’s internal process and procedures, adoption of annual elections and filings of multiple IRS Change of Accounting Method Forms 3115. The final regulations apply to all businesses, including those taxpayers filing Schedule C or E on Form 1040s.
The Regulations were introduced in 2011 and were delayed several times due to taxpayer complaints to the IRS. The final postponement requires the adoption of the Change of Accounting Method to be included with the 2014 tax return filings, as well as, a separate filing to the IRS National Office.
The new regulations, a complete overhaul from the IRS, not only will affect every taxpayer with tangible property, but will be burdensome for CPAs and tax return preparers. Most of the new regulations require recomputations of prior year repair or maintenance costs, supplies and other expenses and capitalized costs resulting in adjustments, both potentially positive and/or negative, which will be recognized in the 2014 filings.
The new regulations, and the Revenue Procedures supporting the adoption, provide for many new definitions and descriptions on how to treat depreciation errors, partial dispositions, and which costs to capitalize and or not capitalize.
Some of the required TPR changes may result in opportunities to write off the remaining basis of capitalized assets based on the new rules. While Form 3115s will be mandatory, many taxpayers will not benefit from the required changes resulting from the adoption should the changes result in additional deductible adjustments. Taxpayers not benefiting from the required changes will include those with Net Operating Losses, limits on Passive Activities, those with large Section 754 benefits and taxpayer with no basis in an investment.
The IRS has issued several Revenue Procedures, some as recent as of January 19, 2015, pertaining to adoption of method changes. Each method change is described in detail within the instructions for Form 3115 and these Revenue Procedures.
There are provisions for small taxpayers, those with gross receipts of less than $10 million. However, Form 3115 will still be required, but with limited input.
Not only will taxpayers be required to update their asset policies, CPAs will need to adopt policies to address the additional compliance needs required by these new regulations and to communicate the new rules to clients in time to file the 2014 tax returns. CPAs should be notifying their clients of these requirements, which will generally be outside the scope of the annual compliance and likely an additional required filing. Taxpayers should be aware of these new rules and the required additional filings when speaking with their tax advisors.
The TPRs will also affect ASC 740(Fin48) disclosure, the domestic production deduction (DPAD), inventory capitalization (Section 263A) and the alternative minimum tax computations.
The IRS has imposed rules for CPAs, known as Circular 230, indicating that preparer penalties will be imposed should returns be filed without the required change of method form or elections described in the new regulations. Returns filed without Forms 3115 will be deemed to be improper filings.
In addition to imposing these new rules for most taxpayers, the IRS will plan to add those taxpayers who did not file Form 3115 to the audit selection process.
The Tangible Property Regulations are very complex and changes will likely pertain to your business.
Should you have any questions related to the information included in this article or how the TPR rules may affect you, contact your Marcum Tax Advisor.