Don’t Miss This Opportunity to File Form 3115

The initial panic at the prospect of implementing the new tangible property regulations was relieved for many tax practitioners with the IRS release of Rev. Proc. 2015-20. Chances are also good that a number of returns have now been completed and filed for qualified small business taxpayers under the relief provision. While this likely saved tax practitioners and taxpayers alike from both a time and financial burden (not welcome during the height of an already compressed busy season), the possibility does exist that accepting the relief may have been the wrong decision for some clients. 

As things settle down, tax practitioners are in a better position to develop a greater understanding of the intention behind the regulations and the mechanics of implementation. In doing so, it may become clear that opportunities were missed that affect their clients and ultimately practitioners and their firm as well. The good news is that there may still be time to revisit completed returns and make any corrections without substantial costs or consequences.

A brief history

The final tangible property regulations issued in T.D. 9636 were created as an attempt to make it easier for business taxpayers to decide how to treat certain acquisitions of tangible property for tax purposes. Complying with the traditional policies for “book” and “tax” methods resulted in additional training, duplication of work, and annual reconciliations between the methods.

While the proposed regulations have been out for several years, many practitioners only became aware of the depth of the changes while attending annual tax updates in the fall of 2014. And despite the intended effect of the new regulations, tax practitioners were less than pleased when learning the specifics.

In response to a public outcry and years of advocating from professional organizations such as the AICPA, the IRS granted relief the second week of February in Rev. Proc. 2015-20. The relief was intended to ease the administrative burden on small business taxpayers by allowing them to apply the regulations prospectively by adopting a cutoff of Jan. 1, 2014. Additionally, they were not required to file Forms 3115, Application for Change in Accounting Method, in certain instances.

While the relief had been eagerly anticipated, once it came it was received with mixed reactions from tax practitioners. Unhappy were those who had spent the past year training their staff, developing procedures, communicating the changes to clients, and even performing much of the advance work. Happy were all of the practitioners who believed the rules had little significance to their smaller business clients and could not justify the additional work and related fees that would be required to comply.

Missed opportunities

The IRS has stated in both Rev. Proc. 2015-20 and in its Tangible Property Regulations – Frequently Asked Questions that accepting the relief does come at some cost, the first of which is the loss of the ability to take an immediate deduction for certain full or partial dispositions of property that were incurred in prior years, but still remain on the fixed asset schedule. The ability to write off these legacy items on the depreciation schedule that are no longer in use will be suspended until the original life expires or the assets are fully disposed of.

The taxpayer also loses audit protection for amounts paid or incurred in tax years beginning before Jan. 1, 2014. If a tax period still open under statute of limitation is examined, the IRS has the ability to make adjustments to items that were not treated according to the final regulations. Had the Form 3115 been filed, any items not adjusted correctly would have been protected.

The ability to pick and choose which of the regulations to implement in the current year is lost, and the taxpayer must use the new method for all changes. Additionally, if the taxpayer determines that it would be beneficial to adopt the method change in a later year, it cannot go back to items acquired before Jan. 1, 2014, and make adjustments.

Filing Form 3115 also establishes a clear record of change in method of accounting. This is also established by the requirement to adopt the proper capitalization polices and in some instances new documented procedures in place at the beginning of the tax year. The IRS has stated that small business taxpayers opting not to file Form 3115 should consider attaching, but are not required to attach, a statement to their 2014 tax return acknowledging their use of the simplified procedure of Rev. Proc. 2015-20.

And possibly the biggest benefit of filing Form 3115 for 2014 returns is that it allows taxpayers to avoid the substantial filing fee for a change in accounting method request.

What can still be done this year?

Now is the ideal time to review client returns already filed, as well as those on extension, to determine if the benefits of filing the Form 3115 exceed the costs. Practitioners should start by developing a process for identifying when the additional work is merited. At a minimum, the depreciation schedules of clients that have a large volume of capital assets, such as those in real estate, manufacturing, construction, etc., should be examined to see if there are items that should be written off.

Returns that are on extension can be pulled and reviewed so the decision of what to do can be made before filing. Returns that have already been filed either with the Form 3115 or without under the relief provisions may be corrected by the extended filing date for the 2014 returns under Regs. Sec. 301.9100(b)2, which states that:

(b) Automatic 6-month extension. An automatic extension of 6 months from the due date of a return excluding extensions is granted to make regulatory or statutory elections whose due dates are the due date of the return or the due date of the return including extensions provided the taxpayer timely filed its return for the year the election should have been made and the taxpayer takes corrective action as defined in paragraph (c) of this section within that 6-month extension period. This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.

The deadline for calendar-year clients is fast approaching. Corporate and partnership returns on extension are due by Sept. 15 and individual returns are due by Oct. 15. Additional clarification was provided for fiscal-year taxpayers or those with 52–53-week years in Rev. Proc. 2015-33.

The bottom line is that tax practitioners still must be educated on the tangible property regulations for both 2014 and future years. The option to elect the relief in Rev. Proc. 2015-20 cannot be made solely on the basis that the tax practitioner lacks the appropriate training and technical competency on the new regulations.

And while the tax preparer is likely in the best position to advise the client on how best to proceed, a minimum amount of analysis must be performed. If the possibility exists that an opportunity was missed on a client return, practitioners should revisit those returns now before time runs out.

Cari Weston, MST, CPA, CGMA, is a senior technical manager in the Tax Division of the AICPA who works with the Tax Practice Responsibilities Committee, the Tax Practice Management Committee, and the Statements on Standards for Tax Practice Task Force. Before joining the AICPA, she spent almost 20 years in public accounting, most recently as the owner of her own tax practice in Austin, Texas.