{"id":1359,"date":"2015-01-22T22:42:14","date_gmt":"2015-01-22T22:42:14","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=1359"},"modified":"2017-10-13T11:35:16","modified_gmt":"2017-10-13T18:35:16","slug":"how-to-prepare-form-3115-for-the-new-tangible-property-regs","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/how-to-prepare-form-3115-for-the-new-tangible-property-regs\/","title":{"rendered":"How to Prepare Form 3115 for the New Tangible Property Regs"},"content":{"rendered":"

2\/17\/2015 Update: Information about our e-book appears at the bottom of page\u2014and that ebook has been updated to reflect Revenue Procedure 2015-20. You can get more information on the new revenue procedure here.<\/a><\/strong><\/p>\n

\"Picture<\/a><\/p>\n

Probably every accountant in our firm is nervous about me doing this.<\/p>\n

But due to a number of requests from fellow CPAs, I\u2019m going to share our approach for complying with the IRS\u2019s requirement that taxpayers request permission to change their accounting method to comply with the new Sec. 263 and Sec. 162 Tangible Property Regs.<\/p>\n

Some Quick Background Info<\/h2>\n

Let me quickly give you some background so you understand why taxpayers and their accountants need to deal with this mess. (Some readers are presumably new to the discussion.)<\/p>\n

A while back, the Internal Revenue Service issued new regulations that require people to account for repairs and maintenance expenditures differently. The rules of the game changed, in other words. (For more information about how the rules changed, refer here<\/a> and here<\/a>.)<\/p>\n

The rub in all this is you can\u2019t simply change the way you do your accounting. You do need to do that. But you need to request permission to make the change. (I know\u2026 crazy.)<\/p>\n

How a 3115 Request Works<\/h2>\n

To request permission to change your accounting for repairs and maintenance expenditures, you fill out a 10-page 3115 form. You then print two copies, filing one with your tax return and one with the Internal Revenue Service Center in Ogden Utah.<\/p>\n

I know what you\u2019re thinking. Why do they need two copies? Good question.<\/p>\n

But now that we\u2019re into this, I may as well mention that you probably won\u2019t file one 3115 form. You\u2019ll probably need to file more than one.<\/p>\n

We\u2019re finding most of our clients need to file at least a \u201ccode 184\u201d 3115 to request permission to change the way that repair and maintenance expenditures are handled and also to change the capitalization procedures for tangible property improvements, for example.<\/p>\n

And then we\u2019re also finding that most clients also need to also file a \u201ccode 192\u201d 3115 to request permission to change the way that asset acquisition and production costs are capitalized.<\/p>\n

You or your clients may have other Form 3115s to file, too.<\/p>\n

Why You Should Jump Through this Hoop<\/h2>\n

Okay, first, let me say this. Most tax accountants think this process you\u2019re supposed to step through is crazy to force on small businesses and mom and pop real estate investors. (Read about the letter the AICPA wrote to the IRS<\/a>, for example.)<\/p>\n

And some tax accountants think the requirement to request an accounting method change is so absurd as to not merit any response (other than maybe a letter to one\u2019s elected representatives).<\/p>\n

I get all that. Emotionally, I am right there with those people.<\/p>\n

But I think you have two strong reasons to prepare and file 3115s with your 2014 tax return.<\/p>\n

First reason: The IRS expects 3115s, and as a result, many CPAs think that returns without a 3115 or two, since they\u2019re obviously incomplete, should bear more audit risk.<\/p>\n

A second reason: This year, you automatically get permission to change your accounting method. In other words, for 2014, a quick and easy automatic consent should occur. If you dilly dally and want to deal with this stuff later on, things may not go so smoothly.<\/p>\n

In worst case scenarios, you could lose deductions because you botched the accounting method change. And you could face expensive fees for making the change late.<\/p>\n

Tips for Learning the New Regs<\/h2>\n

If you\u2019re a CPA or enrolled agent preparing the 3115 form, you should read the roughly 100-pp of regulations (see here<\/a> for the Sec. 1.263 regs for example). That\u2019s really the obvious first step.<\/p>\n

You may also want to read TD 9636<\/a> and TD 9689<\/a>.<\/p>\n

If you\u2019ve got a tax practitioner\u2019s guide such as the popular QuickFinder series, I would also recommend reading through the very synoptic treatment provided in the Small Business edition of the QuickFinder. (The QuickFinder folks did an excellent job.)<\/p>\n

And if you really want to dig into the nitty gritty details, check out Rev. Proc. 2014-16<\/a>, Rev. Proc. 2014-17<\/a> and Rev. Proc. 2014-54<\/a>.<\/p>\n

Beyond that\u2014and now we get down to brass tacks\u2014I would suggest you prepare a few 3115s to see that the process doesn\u2019t have to take that <\/em>long.<\/p>\n

Completing the 3115 Form(s) For the New Regs<\/h2>\n

For most small businesses, to prepare a 3115 for a \u201ccode 184\u201d change, for example, you answer the questions asked in Part I, II, III and V on pages 1 through 3 of the form and then leave empty the questions and blanks on pages 4 through 9. (Note: the revenue procedures linked to above have the complete explanation of which taxpayers need to answer which questions on the form.)<\/p>\n

Pretty straight forward, right? I think so.<\/p>\n

Note that within Part II you answer questions that require additional statements. For example, you\u2019ll need to describe what item you\u2019ll be handling differently\u2014for example, \u201crepairs and maintenance expenses.\u201d And you need to describe your old method and your new method.<\/p>\n

In many cases with our clients, we believe a client\u2019s \u201cold\u201d accounting method was the \u201cproper\u201d old regulation\u2019s method and so use this description in our statement:<\/p>\n

PRESENT METHOD:
\n-REPAIRS AND MAINTENANCE EXPENSE ACCOUNT-
\nCost of incidental repairs which neither materially add to the value of a property nor appreciably prolong its life, but keep a property in an ordinarily efficient operating condition, are deducted per former Treas. Reg. \u00a7 1.162-4.<\/p>\n

-CAPITALIZED IMPROVEMENTS-
\nRepairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of a property, are capitalized per former Treas. Reg. \u00a7 1.162-4.<\/p><\/blockquote>\n

And then our statement indicates that we want to use the \u201cnew\u201d accounting method required by the new regulations, as shown here:<\/p>\n

PROPOSED METHOD:
\n-REPAIRS AND MAINTENANCE EXPENSE ACCOUNT-
\nDeducting repairs costs in accordance with Treas. Reg. \u00a7 1.162-4.<\/p>\n

Deducting routine maintenance costs which fall under the new safe harbor rules for routine maintenance described in Treas. Reg. \u00a7 1.263(a)-3(i).<\/p>\n

Deducting costs for repairs, maintenance, improvements, and similar activities performed on eligible buildings when such treatment is permissible under the new safe harbor rules for small taxpayers described in Treas. Reg. \u00a7 1.263(a)-3(h).<\/p>\n

-CAPITALIZED IMPROVEMENTS-
\nAdopting the new capitalization rules for improving tangible property described in Treas. Reg. \u00a7 1.263(a)\u20133, except in such circumstances where the costs may be treated under the rules described in Treas. Reg. \u00a7 1.263(a)-3(h) (safe harbor for small taxpayers).<\/p>\n

More specifically:<\/p>\n