IRS Eases Repair Regulations for Small Businesses

The Internal Revenue Service has issued a new revenue procedure that aims to make it easier for small business owners to comply with the final tangible property repair regulations.

The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

In addition, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

Revenue Procedure 2015-20 permits small business taxpayers to make certain tangible property changes in methods of accounting with a Section 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after Jan. 1, 2014.  In addition, for their first taxable year that begins on or after Jan. 1, 2014, small business taxpayers are permitted to make certain tangible property changes without filing a Form 3115. 

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen in a statement. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

Many small businesses and tax professionals had requested changes in the repair regulations, including the American Institute of CPAs (see AICPA Recommends Changes to IRS Tangible Property Regulations and Why the Industry Is Addressing the IRS Repair Regulations Backwards). The simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season.

The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less.

The revenue procedure also requests comment on whether the $500 safe-harbor threshold should be raised for businesses that choose to deduct, rather than capitalize, certain capital expenses, to an amount greater than $500, and, if so, what amount should be used and the justification for considering that amount appropriate.

“This simplified procedure will allow small businesses to change a method of accounting on a prospective basis for years starting on or after Jan. 1, 2014,” said David McGure, director of the Cost Segregation Practice at McGuire Sponsel, in an email. “Under this procedure small taxpayers will have the requirement for filing a 3115 waived.  This is in effect for certain small taxpayers in 2014.  Under these regulations a small taxpayer is defined as small businesses, including sole proprietors, with total assets of less than $10 million or average gross receipts of less than $10 million.”

McGuire believes the repair regulations will still provide a tax planning opportunity for clients.  “Where clients have incorrectly capitalized assets in the past, a 3115 may provide an opportunity for tax planning on the 2014 return,” he wrote.