New IRS Regulations – Required Form 3115

In September of 2013, the IRS issued final regulations that help to distinguish capital expenditures from supplies, repairs, maintenance, and other deductible expenses.  Although the final regulations are more taxpayer-favorable than the temporary regulations, they still require a significant investment in time and talent to assure compliance. Virtually every business must comply with these new rules for its first tax year beginning on or after January 1, 2014, but they may be applied to tax years beginning on or after January 1, 2012.

As promised, the IRS has issued automatic consent procedures for changing to the various accounting methods that are required or permitted under these rules. Automatic consent procedures streamline the approval process by allowing you to switch to another accounting method simply by filing the proper information with the IRS, without having to wait for the IRS to grant its consent.

The accounting method changes that are addressed in the automatic consent procedures deal with the rules for materials and supplies; repairs and maintenance; general capital expenditures; the acquisition or production of tangible property; and the improvement of tangible property. These include (but are not limited to):

1. a change to deducting amounts paid or incurred for repair and maintenance;
2. a change to capitalizing amounts paid or incurred for improvements to tangible property, and if depreciable to depreciating such property;
3. a change in the method of identifying a unit of property (UOP), or in the case of a building, identifying the building structure or building systems for purposes of making the changes above;
4. a change to the regulatory accounting method;
5. a change to deducting non-incidental materials and supplies when used or consumed;
6. a change to deducting incidental materials and supplies when paid or incurred;
7. a change to deducting non-incidental rotable and temporary spare parts when disposed of;
8. a change to the optional method for rotable and temporary spare parts;
9. a change by a dealer in property to deduct commissions and other transaction costs that facilitate the sale of property;
10. a change to deducting certain costs for investigating or pursuing the acquisition of real property;
11. a change by a non-dealer in property to capitalizing commissions and other costs that facilitate the sale of property; and
12. a change to capitalizing acquisition or production costs and, if depreciable, to depreciating such property.

This latest guidance also provides automatic consent procedures to change to a reasonable method for self-constructed assets, and to change to a permissible method of accounting for costs related to real property acquired through foreclosure, by deed in lieu of foreclosure, or in another similar transaction. There are also modifications for businesses that transport, deliver, or sell electricity.

The automatic consent procedures combine the separate accounting method change provided in the temporary regulations with the corresponding method change used to comply with the final regulations, but each is assigned a separate designated consent number (DCN) for purposes of filing Form 3115, Application for Change in Accounting Method. There are streamlined filing requirements for “small taxpayers” with average annual gross receipts of $10 million or less for the three preceding tax years.

Generally, if you make one or more of the preceding changes that relate to the same unit of property (UOP), you may file a single Form 3115 and provide a single Code Sec. 481(a) adjustment. If there are negative and positive adjustments, you may report the net negative and net positive adjustments separately on the single Form 3115.

You may want to consider filing amended returns for 2012 and 2013 to take advantage of certain benefits provided by the final regulations. Since you also have the option to use the 2011 temporary regulations for tax years beginning on or after January 1, 2012 and before January 1, 2014, it is important to determine which approach results in a better outcome for your business.

We would be happy to answer any questions you have about the tangible property provisions and the related accounting method changes that are used to implement these rules for your business.  Please contact our office at your earliest convenience.