IRS Provides Form 3115 Relief for Smaller Taxpayers Under Tangible Property Rules

On February 13, 2015, the IRS announced (Rev. Proc. 2015-20) that taxpayers with gross receipts under $10 million (averaged over the prior three years) or assets under $10 million can elect to adopt the 2014 changes to the rules on deducting or capitalizing repairs and property additions without filing Form 3115, Application for Change in Accounting Method. 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 attached statements with respect to Form 3115  in their return.

Rev. Proc. 2015-20 has an unusually taxpayer-friendly application of its $10 million limits. Rather than applying to the entire taxpayer’s assets or gross receipts, they apply to each “separate and distinct trade or business” of the taxpayer. Just keep in mind that no trade or business will be considered separate and distinct unless a complete and separable set of books and records is kept for such trade or business. Plus, if there is a creation or shifting of profits or losses between the trades or businesses of a taxpayer (for example, through inventory adjustments, sales, purchases, or expenses) so that income of the taxpayer is not clearly reflected, the trades or businesses of the taxpayer will not be considered to be separate and distinct.

Taxpayers who are now allowed to forego the Form 3115 might want to file one anyway. For example, the regulations allow taxpayers to write off parts of assets that have had significant replacements installed in prior years, but this deduction is only available for taxpayers filing a Form 3115. A caution to keep in mind: If you select the Rev. Proc. 2015-20 treatment for any trade or business, you forego the change number 196 -- the change for prior year partial dispositions --for all trades or businesses of the taxpayer. So if you want to claim the benefit of the deemed partial disposition of property if, say, you replace a roof, you have to file a Form 3115 to adopt the other parts of the repair regulations. In addition, taxpayers who have aggressively written off expenditures as “repair” amounts that they, maybe, should have capitalized may also want to file a Form 3115 to keep the IRS from going back and auditing the issue for old years. 

If you have any questions or concerns, please do not hesitate to contact your tax advisor.