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Important Changes to IRS Repair Regulations Compliance Rules

Important Changes to IRS Repair Regulations Compliance Rules
Relief provisions announced February 13, 2015

On Friday February 13th the IRS issued new guidance providing much needed relief for small businesses working to comply with the tangible property regulations (TPR). These relief provisions were requested by small business owners and tax professionals and should make it easier for small businesses to apply the TPR for 2014 and future years.

The final tangible property regulations (often referred to as “repair regulations”) were issued in September 2013 and govern when taxpayers must capitalize and when they can deduct expenditures for acquiring, producing or improving tangible property. The repair regulations are fully effective for tax years beginning on or after January 1, 2014.  However, in some circumstances the regulations may apply retroactively to 2012 and could affect taxpayer’s depreciation calculations for earlier years. In addition, the TPR have created several tax accounting and safe harbor elections, some of which require a formal change of accounting method by filing Form 3115, Application for Change in Accounting Method.

With the new guidance issued on Friday February 13th the IRS simplified the Form 3115 procedures to:

  • Allow small businesses (defined as businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less) to change an accounting method under the TPR prospectively for the first tax year beginning on or after January 1, 2014.
  • Waive the requirement to complete and file IRS Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

Taxpayers that elect to apply the new simplified procedure will certainly reduce the administrative burden associated with implementing the TPRs; however the following are potentially undesirable effects of doing so:

  • Will not receive audit protection for its tax years before 2014 for the issues addressed by the tangible property regulations.
  • May not review and clean up its depreciation schedule as of January 1, 2014 for repairs and maintenance reclassification of prior year expenditures.
  • May not claim any prior year partial asset dispositions. However, the current year dispositions may still be claimed on the tax return without filing a Form 3115.

Therefore, taxpayers should be aware that the new simplified procedures are optional for small businesses and a qualifying taxpayer can still elect to file the applicable Form 3115 to comply with the repair regulations. Many small businesses may find it advantageous to file Form 3115 in order to benefit from the factors stated above.

If you have any questions regarding the application of these new simplified procedures to your business, or how your business may be generally affected by the tangible property regulations, please contact Barry D. Groebel, CPA at bdgroebel@herbein.com.

To read the complete IRS announcement click here.

To download our full whitepaper on the New IRS regulations please click here.