In 2013, the IRS released final tangible property regulations that require the capitalization of amounts paid to acquire, produce, or improve tangible property but allow amounts for incidental repairs and maintenance of property to be deducted. Plus, the regulations explain how to distinguish between capital expenditures and deductible business expenses. They are generally applicable to tax years beginning on or after January 1, 2014, and impact all businesses that own or lease tangible property—including buildings, machinery, vehicles, furniture and equipment.
Simplified Tangible Property Regulation: Cut-Off Basis
Many of the small businesses affected asked the IRS to simplify the application of these regulations. In response, the IRS has granted some relief available for 2014 tax returns in the form of a new procedure allowing qualified small businesses to make certain changes in their method of accounting on a “cut-off” basis. Businesses qualify by having either (a) total assets of less than $10 million on the first day of the tax year for which the accounting method change is effective, or (b) average annual gross receipts of $10 million or less for the prior three tax years.
Additionally, the IRS has waived the requirement to file Form 3115: Application for Change in Accounting Method for small business taxpayers who opt to use the simplified procedure for 2014. Therefore, qualified taxpayers may implement the regulations on their tax returns without the burdens associated with Form 3115. However, some may decide to still file the form since that action typically generates prior-year “audit protection” for the item affected by the method change.
Waiver of the Form 3115 requirement applies only to accounting method changes related to the tangible property regulations. Changes associated with other items still require its filing.
But what if you’ve already filed your 2014 return with a Form 3115? Then the IRS has created a transition rule allowing qualified small business taxpayers to withdraw the form by filing an amended return on or before the due date of the taxpayer’s timely filed original federal income tax return for the requested year of change.
CRI’s tax advisors can help your small business determine the most advantageous approach to compliance with the simplified tangible property regulations. Just give us a call.