The TaxSpeaker's opinion re Repair regs & Form 3115 - What is yours?

[Lion]

Preparer penalties are on the line for disregard of the regulations. So, do examine each of your clients on a case by case basis. Once course I took, the speaker suggested a minimum of 60 hours of study on the new regulations. He's now testifying as an expert witness AGAINST tax preparers and for tax payers that were audited and had not complied with the new regs, did not file Forms 3115.

There are elections that do not require 3115. But to comply with the new regs is an accounting method change for most businesses and requires one or more Forms 3115. Unless your client somehow used this new method in the past or started business during 2013 and used the new method from the beginning. If he has materials and supplies, capital assets, a depreciation schedule, he probably needs one or more Forms 3115.

Every business does have "books." They have QB or green ledger paper or a check register or a shoebox. Every business that has filed at least two tax returns (and for some purposes, only one tax return) had adopted an accounting method to report their repairs, capitalized items, materials and supplies. Now they are required to change their method. Form 3115.

Do you know what direction the IRS will take? Will they see the LACK of Forms 3115 with a business/sch C as a great opportunity for an audit? You could put your clients on extension to wait and see.

[MDEA]

tax speaker

I will follow the ideas put forth by tax speaker. Doing the 3115 for each client that depreciates would be a waste of time.

[dkss]

I attended an NATP webinar earlier this year (The nitty gritty of the final repair regs) and was confused as to the reason for form 3115. The webinar mentioned several times that the 3115 was not required for the safe harbors and even not required for partial dispositions Yet, one slide at the end the webinar titled "Accounting method change", stated "even though required, Form 3115 must be filed to adopt and comply with the regulations". Did they mean "even though NOT required, Form 3115....?

I have been reading many conflicting thoughts about these new regs - making me really dread the upcoming season. I still plan to do more research, but when I read the TaxSpeaker opinion, I felt a little less stressed.

The TaxSpeaker opinion makes sense to me. How about you?

[dkss]

the taxspeaker's opinion: http://us1.campaign-archive2.com/?u=...&id=8fcb92a6d8

Implementing the new Repair & Capitalization Regulations
Well small businesses have lost the battle. After 18 months of arguing with the IRS, working with elected Senators and Congressmen (a particular credit to Senator Hoeven from North Dakota) and trying to point out what the new Regulations at 1.162-3, 1.162-4 and related Regulations will require, nothing has happened to change the new Regulations. So here is what we need to do for tax years beginning on or after January 1, 2014.

We have never had a regulatory guide for minimal amounts that may be written off by a business as immaterial, or as repairs and maintenance. Although we have 40 years of judicial guidance, the IRS has decided through the new Regulations that we have three possible choices of immaterial (de minimis) amounts now. And the choice must be made annually and attached every year to the tax return.

Do nothing and your de minimis amount is zero, meaning the business owner or tax professional must individually examine every repair, supply and asset purchase costing more than $0 to determine if it meets one of the 15-20 possible capitalization requirements. We will see in 2015 that most self-prepared tax returns, and most returns done by the fly-by-night tax offices will choose this method through inaction. Because the ability to take Section 179 on an amended return ended for years beginning on or after 1/1/2014 we will not be able to fix this issue upon audit, and we will be required to file a 3115 change in accounting method for them to adopt the new amounts at some future year.

Large businesses that have “applicable financial statements” may adopt a policy of expensing the first $5,000 of items. These folks have the burden of both adopting a policy and changing methods of accounting with Form 3115. An “applicable financial statement” (AFS) is one filed with the SEC; a certified audited financial statement; or a financial statement required to be provided to the federal or state government or any federal or state agency other than the SEC or IRS. (Reg. 1.263(a)-1(f)(4)(i)). These folks will need to use Revenue Procedure 2014-16 to help prepare the 3115.

Now what about businesses without “applicable financial statements”? First, they need to adopt a $500 de minimis policy. We have example policies included in our 1040 manuals and our business manuals but we fully expect all of the major software companies to also include the policies as part of this year’s tax software, and the adoption should merely be checking some box in the software to adopt the policy.

Second we need to see who these businesses are, since they have been ignored by every IRS employee, national CPA firm, financial press and everyone else. These businesses include, according to the SBA website, companies that provide 48% of the GDP in the United States, the bulk of new hiring in the last 20 years, and a large portion of employment. They include every sole proprietor, farmer, small S or C Corporation, LLC or partnership, every rental property owner, every employee that uses Form 2106 to write off business mileage or supplies and every employee that uses Schedule A to write off other business related repairs, supplies or small tools. Wait a minute are you telling me that nearly every tax return in America will require that we attach this “de minimis” election? Well, yes that is what I am saying, because if you do not, you adopt zero as your de minimis amount! Ridiculous, huh? But the fun doesn’t stop there.

Every IRS employee, large CPA firm and advisor is also telling us that every one of these same Schedule A filer, Schedule C filer, Schedule E filer, Schedule F filer and corporate or partnership return filer must also file Form 3115 to change their method of accounting to comply with the new Regulations. Have you read the instructions to Form 3115, the part that says it takes 23 hours and 48 minutes to complete? Are you telling me that Grandma Jones, that rents an apartment in her basement for $200 monthly has to make a de minimis election and file a Form 3115? The Schedule C body shop guy making $30,000 annually has to file the de minimis election and a 3115? The small S corp that runs a Subway restaurant making $50,000 has to file these forms? If you believe everything you read, yes. One simple question to all of these pundits, particularly the IRS-who is going to pay us to prepare these Forms 3115? Is Grandma Jones going to pay me an additional $750 to fill out this form? No, neither she nor any small business in America will do that.

Here is where we point out the issue. Every one of these advisers refers to the requirement to file a 3115 to change methods of accounting for the taxpayer’s books to comply with these new Regulations. Every single author, speaker and advisor in the country has jumped on that bandwagon, and even refers to the wording at the Regs that seem to require a 3115, in particular 1.162-3(i) which states “… a change to comply with this section is a change in method of accounting..”

Companies that have applicable financial statements, reviewed financial statements, or any other system that has had them adopt a repairs and capitalization policy will need to file the 3115 because they are changing methods of accounting. I agree with the pundits on that statement. However I believe there is a basic flaw in their advice to everyone else, and it is born out in something stronger than the IRS Regulations, it is established by Congress as United States law in Internal Revenue Code Section 446(a) which states “Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.”

And here is what the experts are missing. Grandma Jones does not have a set of books and has never adopted a method of accounting for repairs, supplies or small tools because she never had a need, nor an option. Similarly the small S corporation or partnership or LLC without formal financial statements does not have a set of books or if they do have also never adopted a method of accounting for repairs, supplies or small tools. Therefore they are not “changing” a method of accounting, for which a Form 3115 is required, they are initially adopting a method of accounting in the first year that such adoption is allowed as an option. No 3115 is required to “adopt” a method of accounting, just to change an existing method!

In summary we believe an election and a Form 3115 is required for businesses that have adopted a repairs or capitalization policy for their books, particularly those with formal financial statements and footnotes. For the bulk of small businesses that have never adopted a previous repairs and capitalization policy such as nearly every Schedule A,C,E,F filer in America as well as the vast majority of S corporations and LLC’s we believe that they need to adopt a de minimis policy for 2014, but we do not believe they are required, and we will not file a 3115 “Change in Accounting Method” form when no change is occurring, just an initial adoption.

Clearly this is an opinion which you may not share, in which case do two things: read Code Section 446 and the related Regulation cited above and read the word “change” in context; and then decide. Filing form 3115 is your decision to file based on your own interpretation of the law, combined with the need to balance the benefits of filing a form that we do not believe is required for many small businesses with the cost of preparing such a form. If your opinion differs, file the Form. We will not be filing Form 3115 except for those clients that have in the past adopted a repairs and capitalization policy and who are changing to comply with this new policy.