The IRS has announced that some taxpayers are granted elective relief from filing Form 3115 as a result of the Repair Regulations. The regulations became mandatory for all tax years beginning on or after January 1, 2014. These regulations put a heavy compliance burden on the taxpayer, especially in the first year. The IRS recently issued Revenue Procedure 2015-20 which provides relief for small business taxpayers. If your assets are under $10 million or average gross revenues are under $10 million, you do not have to file Form 3115 with your 2014 tax return. The IRS will allow you to comply with the repair regulations on a “cut-off” basis allowing you to start complying in 2014. However, it may be advantageous for some taxpayers to file Form 3115 in spite of the new relief.
The regulations affect all businesses that own or lease tangible property, including buildings, machinery, vehicles, furniture and equipment.
Repair Regulations Simplified Procedures
The simplified procedure generally is available to small businesses — including sole proprietors — with total assets of less than $10 million on the first day of the tax year for which the accounting method change is effective or average annual gross receipts of $10 million or less for the prior three tax years. These tests are applied at the trade or business level. For example, a C corporation holding company with three single-member limited liability companies (SMLLCs) must apply the tests at the SMLLC level.
The IRS has also 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. Qualified taxpayers may therefore implement the regulations on their tax returns without the burdens associated with Form 3115, although some may nonetheless find it advisable to file the form.
A taxpayer who properly files Form 3115 typically receives prior-year “audit protection” for the item affected by the method change. In other words, the IRS can’t audit open tax years and charge the taxpayer interest and penalties for underpayments related to use of the previous method. Some small business taxpayers may want to file Form 3115 to ensure audit protection.
Be aware, too, that the 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 the filing of Form 3115.
What if you’ve already filed your 2014 return with a Form 3115? The IRS has created a transition rule that permits qualified small business taxpayers to withdraw their Form 3115 by filing an amended return on or before the due date of the taxpayer’s timely filed (including any extension) original federal income tax return for the requested year of change.