Simplified R&M accounting method change procedures for small business taxpayers

On Feb. 13, 2015, the IRS released Revenue Procedure 2015-20 providing relief for small business taxpayers to comply with the final repair and maintenance (R&M) regulations for 2014.

Simplified procedures for 2014 tax returns

To ease administrative burden in applying the final R&M regulations beginning in 2014, the new revenue procedure allows small business taxpayers to make certain changes in methods of accounting with a § 481(a) adjustment that takes into account only amounts paid or incurred and dispositions, in taxable years beginning on or after Jan. 1, 2014.

This change means small business taxpayers making these changes in method of accounting for the first taxable year that begins on or after Jan. 1, 2014, may elect to make the change on a cutoff basis. However, you may not want to utilize the simplified procedures for several important reasons. See discussion section below.

In addition, for the first taxable year that begins on or after Jan. 1, 2014, small business taxpayers are permitted to apply the R&M regulations without filing a Form 3115 solely through the filing of a federal tax return.

A small business taxpayer is defined as a business with:

  • Total assets of less than $10 million or
  • Average annual gross receipts totaling $10 million or less for the prior three taxable years

A small business taxpayer choosing the option of applying the R&M regulations on a prospective basis starting with the 2014 tax year does not receive audit protection for taxable years beginning prior to Jan. 1, 2014, and must apply the disposition regulations on a prospective basis. If a small business taxpayer chooses to apply the disposition change prospectively, it is not permitted to make a late partial disposition election.

If a small business taxpayer previously filed its federal tax return for its first taxable year beginning on or after Jan. 1, 2014, a transition rule provides it may withdraw the Form 3115 through the filing of an amended return on or before the due date of the taxpayer’s timely filed (including extensions) original federal income tax return for the requested year of change.

The revenue procedure applies only to small business taxpayers, as defined above. Other taxpayers must still analyze their current accounting methods vis-à-vis the final regulations and determine if they need to file a Form 3115 with their 2014 return.

While this revenue procedure provides simplified procedures for some taxpayers, many small business clients may still choose to file a Form 3115 with a § 481(a) adjustment including deductible R&M costs placed in service prior to Jan. 1, 2014. In addition to receiving audit protection and preserving the ability to make a late partial disposition election, deducting prior capitalized R&M costs on the 2014 return is an obvious benefit.

Also, some small business taxpayers may still choose to file a Form 3115 in order to retain a clear record of a change in method of accounting.

Safe harbor threshold – request for comments

The revenue procedure also requests comments on whether the $500 safe harbor limit for a taxpayer without an applicable financial statement (AFS) should be increased. Written comments are requested by April 21, 2015.

The de minimis safe harbor provided in the final R&M regulations is intended as a new administrative convenience whereby taxpayers are permitted to deduct small dollar expenditures for the acquisition or production of new property. The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible.

The existence of the de minimis safe harbor does not mean that a taxpayer cannot establish a de minimis deduction threshold in excess of the safe harbor amount, provided the taxpayer can demonstrate a higher threshold clearly reflects the taxpayer’s income.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.