Up until recently, most businesses needed to file Form 3115 to ensure that tangible property items have been properly capitalized or expensed in current and prior years. However, the IRS recently issued Revenue Procedure 2015-20 which provides relief for certain businesses. Under this new procedure, certain small taxpayers have the option of following the new regulations only prospectively, without filing a 3115. Please note that a small taxpayer is any business with total assets of less than $10 million as of the beginning of the first tax year that started on or after Jan. 1, 2014, or with average annual gross receipts of $10 million or less over the three prior tax years.
What if our business still needs to file form 3115?
First, you should note that it will take time to review the regulations associated with Form 3115. Specifically, be prepared to spend time reviewing your accounting records. The IRS has actually provided guidance for practitioners and businesses to understand and apply the law. Specifically, the IRS recommends 20 hours to learn the law, 39 hours to review work papers and 24 hours to prepare the form. While we believe that these estimates are a little extreme, it will still take several hours.
While it may take time to prepare, it’s important to note that your business may benefit financially by filing the form. There may be several instances in which your business can and should have claimed expenses that it has not done so in the past. This will be reported as an IRC Section 481(a) adjustment.
How should we approach depreciation?
In your review, you will need to focus on pre-2014 depreciation schedules. These schedules will allow you to determine what items you are still depreciating and whether any of those items should be classified as currently deductible expenses. Please note that fully depreciated property is exempt from the new regulations. Also, review expenses that were deducted that should have been capitalized. You will need to determine if those expenses are an improvement by testing for betterment, adaptation, or restoration; if not an improvement under this test, it is a repair expense.
What specific rules are impacted by the new filing form?
The key regulations relate to Internal Revenue Code Sections 1.263(a)-1, 1.263(a)-2, 1.263(a)-3, 1.263(a)-6, 1.162-3, 1.162-4, 1.162-11, 1.167(a)-4, 1.168(i)-1, 1.168(i)-7, 1.168(i)-8 and 1.1016-3. Furthermore, the following codes may be relevant as you file the form.
Method #184 with a citation to 1.162-4 – Ability to deduct repair and maintenance costs
Method 184 with a citation to 1.263(a)-3(i)) – Ability to employ the new routine maintenance safe harbor of 1.263(a)-3(i)
Method #186 (non-incidental) and/or #187 (incidental)) – Ability to deduct up to $200 per unit of property for either incidental or non-incidental materials and supplies costs; Ability to employ the new TPR rules for non-incidental and incidental material and supplies
Method #192 – Ability to properly capitalize and depreciate amounts paid to acquire or produce tangible property