Matter & Substance
  March 2, 2015

New Changes on Implementation of IRS Tangible Personal Property Regulations

My colleague Jonathan Sniegowski provided the following summary on the very recent announcement of the IRS concerning the implementation of the tangible personal property regulations. We have been actively addressing compliance with these regulations with our clients:

On Friday, February 13, 2015 (13½ months after the effective date of the final tangible property regulations) the IRS released Rev. Proc. 2015-20, which permits small businesses to:

  • Change a method of accounting under the final tangible property regulations on a prospective basis (i.e. no required Sec 481(a) adjustment), and
  • Avoid completing and filing a Form 3115 in order to adopt the regulations (the regulations are considered adopted solely through the filing of a 2014 - no separate statement or 3115 is required to be attached).

The new optional simplified procedure is generally available to small businesses, including individual taxpayers, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. The majority of our clients are now eligible for this simplified method of adopting the regulations.

It may still be advisable to file Forms 3115 (even if not required) in a number of cases:

  • Filing Form 3115 is still the only method available to obtain audit protection for the tax treatment of any repairs/supplies expenditures paid or incurred prior to 2014.
  • Analysis of depreciation schedules has resulted in finding negative Section 481(a) adjustments for a number of clients. These negative Section 481(1) adjustments result in additional deductions in 2014. Filing of Form 3115 is still necessary to take advantage of these negative adjustments. We should continue to review depreciation schedules closely in connection with preparing 2014 tax returns.
  • We should continue to review depreciation schedules for partial asset dispositions. If late partial asset disposition election is made (change number #196), we need to file the Forms 3115 under the old procedures in order to take advantage of this tax benefit; the new simplified procedure is not available when making a #196 change.
  • Our clients with total assets exceeding $10M as of the beginning of 2014 are not eligible for the simplified procedure and will need to file Forms 3115.