Facing mounting pressure from various parties to grant relief, the IRS has provided an optional “simplified” method of complying with the new repair/tangible property capitalization regulations in Revenue Procedure 2015-20. In addition to issuing the ruling, the IRS also issued a press release (IR-2015-29) describing the relief.

The relief is available to “small business taxpayers” which are taxpayers that meet one of the following two criteria:

Total assets of less than $10 million
Average annual gross receipts of $10 million or less for the prior three taxable years

Basic Relief

The IRS summarizes the relief as follows:

Qualifying taxpayers will only have to take into account amounts paid or incurred and dispositions in taxable years beginning on or after January 1, 2014. As the IRS notes, this effectively allows those taxpayers to make the changes on a “cut-off” basis with the old regulations applying to prior year acquisitions, and the new regulations applying to later acquisitions
Such taxpayers will also be to make certain tangible property changes without having to file a Form 3115. While a small business may choose to file the form (and there are some advantages to doing so), a taxpayer who uses the simplified method will not need to file either a Form 3115 or any other statement with their return.

The IRS notes, as well, that certain simplifying provisions in the final regulations are elective measures that do not require an accounting method change. Those elective measures identified in the Revenue Procedure include:

The election to apply the de minimis safe harbor in § 1.263(a)-1(f);
The election to utilize the safe harbor for small taxpayers in § 1.263(a)-3(h) [the small building safe harbor; and
The election to capitalize repair and maintenance costs in § 1.263(a)-3(n)

Finally, the procedure asks for comments on increasing the de minimis amount for taxpayers who do not have an applicable financial statement to something greater than the $500 limit found in the current regulations.

Specific Changes Covered

Section 5 of Revenue Procedure 2015-20 allows a qualifying taxpayer to take into account only amounts paid or incurred and dispositions in taxable years beginning on or after January 1, 2014 for the following automatic changes found in Revenue Procedure 2015-14:

The various changes covered by Revenue Procedure 2015-14, section 10.11(3)(a) which includes:
- A change to deducting amounts paid or incurred for repair and maintenance or a change to capitalizing amounts paid or incurred for improvements to tangible property and, if depreciable, to depreciating such property under § 167 or § 168. Includes a change, if any, in the method of identifying the unit of property, or in the case of a building, identifying the building structure or building systems for the purpose of making this change (§§ 1.162-4, 1.263(a)-3). DCN 184;
- Change to the regulatory accounting method (§ 1.263(a)-3(m)) DCN 185;
- Change to deducting non-incidental materials and supplies when used or consumed (§§ 1.162-3(a)(1), (c)(1)) DCN 186;
- Change to deducting incidental materials and supplies when paid or incurred (§§ 1.162-3(a)(2), (c)(1)) DCN 187;
- Change to deducting non-incidental rotable and temporary spare parts when disposed of (§ 1.162-3(a)(3), (c)(2)) DCN 188;
- Change to the optional method for rotable and temporary spare parts (§ 1.162-3(e)) DCN 189;
- Change by a dealer in property to deduct commissions and other costs that facilitate the sale of property (§ 1.263(a)-1(e)(2)) DCN 190;
- Change by a non-dealer in property to capitalizing commissions and other costs that facilitate the sale of property (§ 1.263(a)-1(e)(1)) DCN 191;
- Change to capitalizing acquisition or production costs and, if depreciable, to depreciating such property under § 167 or § 168 (§ 1.263(a)-2) DCN 192;
- Change to deducting certain costs for investigating or pursuing the acquisition of real property (whether and which) (§ 1.263(a)-2(f)(2)(iii)) DCN 193
A change in the method of identifying which assets in multiple asset accounts or which portions of assets have been disposed of by the taxpayer from the FIFO method of accounting under § 1.168(i)-8(g)(2)(i) or the modified FIFO method of accounting under § 1.168(i)-(g)(2)(ii) to the specific identification method under § 1.168(i)-8(g)(1) [Revenue Procedure 2015-14, Section 6.37(3)(a)(iv)] DCN 200;
A change in the method of identifying which assets in multiple asset accounts or which portions of assets have been disposed of by the taxpayer from the FIFO method of accounting under § 1.168(i)-8(g)(2)(i) to the modified FIFO method of accounting under § 1.168(i)-8(g)(2)(ii), or vice versa [Revenue Procedure 2015-14, Section 6.37(3)(a)(v)] DCN 200;
A change in the method of identifying which mass assets (as defined in § 1.168(i)-8(b)(3)) in multiple asset accounts or which portions of mass assets have been disposed of by the taxpayer from the FIFO method of accounting under § 1.168(i)-8(g)(2)(i) or the modified FIFO method of accounting under § 1.168(i)-8(g)(2)(ii) to a mortality dispersion table in accordance with § 1.168(i)-8(g)(2)(iii) [Revenue Procedure 2015-14, Section 6.37(3)(a)(vii)] DCN 200;
A change in the method of identifying which mass assets (as defined in § 1.168(i)-8(b)(3)) in multiple asset accounts or which portions of mass assets have been disposed of by the taxpayer from a mortality dispersion table in accordance with § 1.168(i)-8(g)(2)(iii) to the specific identification method under § 1.168(i)-8(g)(1), the FIFO method of accounting under § 1.168(i)-8(g)(2)(i), or the modified FIFO method of accounting under § 1.168(i)-8(g)(2)(ii) [Revenue Procedure 2015-14, Section 6.37(3)(a)(viii)] DCN 200;
Disposition of a building or structural component (§ 168; § 1.168(i)-8) [Revenue Procedure 2015-14, section 6.38] DCN 205;
Dispositions of tangible depreciable assets (other than a building or its structural components) (§ 168; § 1.168(i)-8) [Revenue Procedure 2015-14, section 6.39] DCN 206;

If a taxpayer computes its §481(a) adjustment by only considering amounts incurred or dispositions in taxable years beginning on or after January 1, 2014, then the taxpayer is not required to file a Form 3115. [Revenue Procedure 2015-20, Section 5.01]

Section 5 goes on to make conforming changes to Sections 10.11, 6.37, 6.38, 6.39 and 6.33 of Revenue Procedure 2015-14.

Some Trade-Offs

There a few trade-offs taxpayers who choose to use the simplified method will make in order to avoid having to file the Form 3115 or go back through their prior years to apply the new rules.

If the taxpayers are filing Form 3115 to cover issues not addressed in this revenue procedure, the taxpayer will not be able to make concurrent automatic changes that would otherwise have been allowed as part of the Form 3115 without filing a Form 3115—that is, you can’t “piggyback” other changes that could have been part of the Form 3115 that would be filed under the “standard” rules.

Taxpayers using the simplified procedures will not receive audit protection for these areas as generally provided for in Revenue Procedure 2015-13, Section 8.01 for those filing a Form 3115 for taxable years beginning before January 1, 2014. A Form 3115 filing that considered items going back to the inception of the business would generally receive such protection for prior years.

A taxpayer electing to not take into account amounts paid or incurred for year prior to January 1, 2014 for the broad set of changes covered by Section 10.11 of Revenue Procedure 2015-14 will be prohibited from computing a §481(a) adjustment that takes into account dispositions in taxable years beginning prior to January 1, 2014 under the following provisions:

Permissible to permissible method of accounting for depreciation of MACRS property [Revenue Procedure 2015-14, Section 6.37]
Disposition of a building or structural component [Revenue Procedure 2015-14, Section 6.38]
Dispositions of tangible depreciable assets (other than a building or its structural components) [Revenue Procedure 2015-14, Section 6.39]

If a taxpayer wishes to use those procedures for a pre-2014 disposition, the taxpayer will need to make use of the standard procedures (including filing a Form 3115 and computing the §481(a) adjustment without limiting the adjustment to items occurring in years beginning after January 1, 2014) for the long series of changes covered by Section 10.11 of Revenue Procedure 2015-14.

These taxpayers will also not be allowed to make a late partial disposition election under 6.33 of Revenue Procedure 2015-14 that looks back to those years prior to January 1, 2014. Since this adjustment would be a negative adjustment entirely picked up in the year of change, a taxpayer who had been conservative and capitalized various items that now represent replacements may need to decide if the tax savings of getting the late partial disposition election is worth the cost of making the full accounting method changes for amounts paid and incurred for prior years, including preparing the Form 3115.

Another minor issue is that taxpayers who do not make the change of method with a full §481(a) adjustment will have two sets of regulations to apply in the determination of the proper amounts and bases of tangible assets in any future examination. Amounts incurred and dispositions taking place in tax years beginning before January 1, 2014 will be tested under the prior regulations, while those taking place in later years will be tested under the current regulations.

Withdraw of Prior Form 3115

If a taxpayer has already filed its tax return for its first taxable year beginning on or after January 1, 2014 with which it submitted a change request and §481(a) adjustment as previously required by the regulations, the taxpayer may withdraw that change and revert to the simplified method by filing an amended return on or before the due date of the taxpayer’s timely filed (including any extension) original federal tax return for the year of change.

As a practical matter this option would primarily make sense for a taxpayer facing a positive §481(a) adjustment. Otherwise there seems little advantage to be gained by incurring additional costs to undo the filings.

Request for Comments on De Minimis Safe Harbor

While requesting comments on increasing the de minimis safe harbor, the IRS inserts a paragraph that appears to try and make the case regarding why a higher limit may not really be necessary.

Section 3.02 states:

The de minimis safe harbor provided in the final tangible property regulations is intended as a new administrative convenience whereby taxpayers are permitted to deduct small dollar expenditures for the acquisition or production of new property or for the improvement of existing property, which otherwise must be capitalized under the Code. The de minimis safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor. The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible. Consistent with longstanding law, a taxpayer may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amount. In addition, the existence of the de minimis safe harbor does not mean that a taxpayer cannot establish a de minimis deduction threshold in excess of the safe harbor amount, provided the taxpayer can demonstrate that a higher threshold clearly reflects the taxpayer’s income. In conjunction with section 179, which also allows small business taxpayers to immediately expense certain otherwise capital expenditures, the de minimis safe harbor provides significant tax simplification to small businesses.

The notice does go on to provide an address to which comments may be sent and sets a deadline of April 21, 2015 for such comments. As that date should make clear, the IRS does not seem to plan at this time to have any higher level limit in place before the original filing deadline for calendar year taxpayers.

Nevertheless, the issues raised in the paragraph quoted above do provide a number of options for claiming deductions on items that exceed the $500 invoice cost limit. The notice also clearly states that a taxpayer may establish a de minimis deduction threshold in excess of $500—some commentators had speculated that such a threshold would render the taxpayer ineligible to make a safe harbor election. Rather, the election would still give protection to those items with an invoice cost below $500.

Now What?

Advisers must remember that while this provides a simplifying option (and one which I would expect the vast majority of qualifying taxpayers to take advantage of), there may still be cases where the taxpayer would benefit from bypassing the simplified method. In such a case a taxpayer would go ahead and file the Forms 3115 that would have been required had this Revenue Procedure not been issued and compute the necessary §481(a) adjustment.

When would this make sense? The most obvious reason it would make sense is if the taxpayer is able to remove not yet fully-depreciated assets from its depreciation schedule (thus triggering a current year loss as a §481(a) adjustment), something that might be true if the taxpayer had been conservative in its capitalization policy in prior years. For instance, a late partial disposition election could prove very helpful to a taxpayer that had capitalized the entire cost of a replacement roof in the recent past.

Advisers must also note that this notice does not put the taxpayer back where he/she was before the final regulations. The final regulations are still in force and must be applied for amounts paid and/or dispositions taking place in years beginning on or after January 1, 2014.

The various annual elections also are still required to be made beginning with this year if the taxpayer wants to take advantage of the benefits of the election.

Thus it is still important for the adviser to have a full understanding of the provisions of these regulations and be able to both apply and take advantage of them (there really are some very taxpayer friendly parts of the regulations).

What we don’t face, though, is having to go through a wasteful and unproductive process for a large number of taxpayers who would have filed change requests that would have given the IRS virtually no information, but resulted in a large amount of paper making its way to Ogden, Utah over the next few months.