The Internal Revenue Service has made it easier for small business owners to comply with the tangible property regulations (“the repair regulations”). The regulations themselves have not changed, only the implementation procedure has changed. Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 tax return. The new procedures allow small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after January 1, 2014.
This means that small businesses will only have to take into account amounts paid or incurred and dispositions in taxable years beginning on or after January 1, 2014. This effectively allows those taxpayers to make the changes on a “cut-off” basis without having to “look-back” and re-examine prior years. Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.
The new simplified procedure is generally available to small businesses, including sole proprietors and rental property owners, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less.
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 with Form 3115, the taxpayer may withdraw that change and revert to the simplified method by filing an amended return. However, unless the Form 3115 included a Section 481(a) adjustment to taxable income, there would be no tax effect to filing the amended return.
The IRS notes that certain provisions in the final regulations are elective and do not require an accounting method change. As such, the elections are still required to be made by the small business taxpayer if the taxpayer elects to apply them. These include the election to apply the $500 de minimis safe harbor for expensing a unit of tangible property regardless of its useful life, the election to utilize the safe harbor for small taxpayers to expense capital improvements for qualified small buildings, and the election to capitalize repair and maintenance costs.
The revenue procedure also requests comment on whether the $500 safe harbor threshold should be raised for small businesses that choose to deduct rather than capitalize certain expenses. The IRS has set a deadline of April 21, 2015 to receive comments on this provision. Therefore, it is unlikely the IRS will have a change in this amount, if any, in place before the original filing deadline for calendar year taxpayers.
If you have questions about how this impacts you, please do not hesitate to contact us at 239-433-5554. You may also visit our website at www.markham-norton.com.