Small business taxpayers will be allowed to make certain accounting method changes under the tangible property (or “repair”) regulations without filing Form 3115, Application for Change in Accounting Method, in their first tax year beginning on or after Jan. 1, 2014, the effective date of the repair regulations, the IRS announced on Friday (Rev. Proc. 2015-20). The revenue procedure also allows small businesses to make certain accounting method changes on a cut-off basis, that is, with a Sec. 481(a) adjustment that only takes into account amounts paid or incurred, and dispositions, in tax years after Jan. 1, 2014.
For purposes of the revenue procedure, a small business is defined as one with total assets of less than $10 million on the first day of the tax year for which the accounting method change is effective or average annual gross receipts of $10 million or less for the prior three tax years. The IRS reports that since issuing the final repair regulations it has received numerous requests to make the process of applying the regulations simpler for small businesses and especially to allow them to apply the new rules on a cut-off basis and without filing Form 3115.
In response to this feedback, the IRS is allowing, for their first tax year that begins on or after Jan. 1, 2014, small business taxpayers that choose to prospectively apply the tangible property regulations to amounts paid or incurred, and dispositions, in tax years beginning on or after Jan. 1, 2014, to make certain tangible property accounting method changes on their federal tax return without including a separate Form 3115 or separate statement. Taxpayers that wish to file Form 3115 may do so, however.
In addition, the IRS is asking taxpayers to comment on whether the de minimis safe harbor under the tangible property regulations for taxpayers without applicable financial statements, which is currently $500, should be increased. Comments should be submitted to the IRS by April 21 to the addresses in the revenue procedure.
In a prepared statement, Barry Melancon, president and CEO of the AICPA, welcomed the changes announced in the revenue procedure, saying, “The AICPA and the state CPA societies have made numerous requests on behalf of our members and their small business clients for this relief over several months. We appreciate that the IRS understood how burdensome the regulations are for small business and acted to provide relief for 2014 and future year tax returns.”
In one of several comment letters to the IRS and Treasury, the AICPA stressed the significant burden that small businesses would face to comply with the rules and urged the agencies to change the retroactive application. The AICPA believes these changes will reduce the administrative burden and compliance costs for small businesses this year and will have an immediate impact on the tax preparer community.