Accounting method changes related to new repair regulations

Technical topics regarding tax preparation.
#1
slkath  
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Are there any opinions concerning the upcoming tax season and how to deal with the accounting method changes in regards to the new repair regulations? There are some really dire blogs and postings concerning filling a Form 3115 with multiple accounting changes and multiple Section 481 adjustments for our business clients. In many cases these authors are suggesting that if these filings and 481 calculations/adjustments are required that the time spent on our business returns could double. I find it hard to believe that even if required, that a majority of business tax returns will have accurate Form 3115s completed. How are some of your preparing for these filings? If these requirements hold, forget the issues with the ACA and the time spent on returns dealing with it, the new repair regulations and the accompanying accounting method changes are going to be the beast of the 2014 tax season.
 

#2
Coddington  
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That's because bloggers, presenters, and posters are often alarmists. I have a collection of some of the more egregious myths I've run across this year at this link.
-Brian

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#3
JR1  
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Consensus that I'm seeing from tax teachers I respect all agree that a 3115 isn't necessary for any of our small biz clients. We do need to attach the election. Tax Speaker aka Bob Jennings, AES/Ed Roche are two...
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#4
Coddington  
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Sorry, but Bob Jennings is wrong. Scott MacKay (then of Treasury) actually went out of his way at the 2014 ABA Tax Section Mid-year meeting to address some of the misinformation Jennings has been spreading. It's rare to hear a governmental panelist so upset by what's going on in the marketplace.

The only time a Form 3115 would not be necessary is if the taxpayer has never had any repairs or improvements, has no materials or supplies impacted by the new regs, and so on. (This always happens with new taxpayers, such as via a valid 351 drop-down.) In applying section 446, every circuit that has ruled on the issue agrees that taxpayers must file method changes even when going from an impermissible method. (The 10th Circuit had a different approach applying the predecessor statute from the '39 Code, but the revised language of section 446 trumps that approach.) Changing its long-standing regulations for ambiguous statutes, even if contrary to prior judicial precedents, is within the power of Treasury in the post-Mayo world. So any year that a taxpayer has material, supply, repair, improvement, or other costs that are treated differently under their current method and under the new regs, the taxpayer would need to file a Form 8725-R. Now, from a practical standpoint, many small taxpayers will be able to use the new de minimis safe harbor and the new small taxpayer safe harbor and avoid most issues going forward.

From this perspective, the filing of Forms 3115 with zero-dollar section 481(a) adjustments, prospective application of the regulations as of 1/1/14, and use of the safe harbors is generally the safest course. Treasury and Chief Counsel have been going around saying that review of section 481(a) adjustments is a Field issue and no one is aware of a situation where the lack of a negative adjustment unwinds an otherwise valid method change. The problem for many small clients, however, is that if there is no method change, they reported repair expenses on their pre-'14 returns, and they have no improvements on their fixed asset records, the Service might dig deeper and come up with a positive section 481(a) adjustment. So you'd need to do a risk analysis for your clients to see whether they are exposed or have an opportunity under the regs. Of course, for many small clients, like those that use most property management companies, you won't even have enough info to apply the de minimis and small taxpayer safe harbors, so you'll have to look at the regs (and method changes) for other options.
-Brian

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#5
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So, how would it work: Guy expenses a roof in 2010 based on his interpretation of the UOP rules. Then, in 2020, he puts a new roof on and realizes it can't be expensed under the new regs, so he capitalizes it. IRS comes in and says, "Under your 'method of accounting,' you can't capitalize the roof in 2020, you must expense it. This is because you never changed your accounting method via the filing of Form 3115. So, we'll make you expense it, but that would be following your improper method of accounting, so we'll make you capitalize it."

What am I missing? Will the IRS come back and say that since I expensed the roof in 2010 we now have to go back and capitalize it and compute the difference between what I took (the expense) and what was allowed (depreciation over 27.5 or 39-years)?
 

#6
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Yes, that is what would happen in theory, but, dun, dun, dun...how would they know? They're going to pull a ten year old return that probably no longer exists anywhere to look for a higher than normal repair expense? LOL.

It's more likely to arise in a situation where the earlier year is still open and they're looking at that year or where you're trying to make a partial disposition election and improvements were not properly capitalized and you get stuck figuring it out.
-Brian

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#7
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Sounds like the ole 'Don't throw me in the briar patch, boss' trick, CK.
 

#8
Coddington  
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Sorry, misread your post, CK. In 2020, the Service would say that you have to capitalize the 2020 roof. Since it was capitalized, there wouldn't be an issue. Now, if they know you didn't file a method change in 2014 and that the taxpayer should have previously capitalized the 2010 roof, preparer penalties may be in play. Also, there is authority that you can make an unauthorized method change and it will be safe once the year of change closes. So if they're looking at the 2020 roof in 2026, you're probably fine. And, in reality, if your taxpayers already have decent capitalization policies already and don't have much in the way of improvements, you might be okay delaying the method change until improvements are at issue. This may be the biggest rodeo I've ever seen, but it is far from my first. The Service knows that not everyone is going to make a change this year.
-Brian

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SourceAdvisors.com

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#9
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I personally am planning on filing as many forms 3115 as possible, an hope everyone else does as well, imagining the millions upon millions of pieces of mail going to Ogden for processing.
 

#10
JR1  
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I am not. A. That's crazy freakin' work, and B. Who exactly do I bill for that? Really?
I'm going to close my eyes and lean on: This is 1.263(a)-1(f) and I'm sure Chris is just saying it won't apply...there's a similar provision for the 10k building thing. So I'll include the election and call it a day. Like they're going to even keep the 3115's. They stack them in the warehouse in Ogden, UT next to Ms. Lerner's emails.
(f)
De minimis safe harbor election
—(1)
In general.
Except as otherwise pro-
vided in paragraph (f)(2) of this section,
a taxpayer electing to apply the de
minimis safe harbor under this para-
graph (f) may not capitalize under
§ 1.263(a)–2(d)(1) or § 1.263(a)–3(d) any
amount paid in the taxable year for the
acquisition or production of a unit of
tangible property nor treat as a mate-
rial or supply under § 1.162–3(a) any
amount paid in the taxable year for
tangible property if the amount speci-
fied under this paragraph (f)(1) meets
the requirements of paragraph (f)(1)(i)
or (f)(1)(ii) of this section.
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#11
golfinz  
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I am doing the following for every client:

1) DMSH
2) Filing method changes 184, 186 and 192
3) SHST

If they own real estate, or apt complex:
4) Method 21 for removal costs

For the larger clients:
5) Consider method change 177 and 178
 

#12
Coddington  
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And that is what everyone should be looking at, though 177 and 178 can often be left to the Cost Seg companies that will be prospecting the heck out of everyone.
-Brian

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#13
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I’m a bit confused. My understanding is that a taxpayer who makes the de minimis safe harbor election of Treas. Reg. §1.263(a)-1(f) is not required to file Form 3115 because under Treas. Reg. §1.263(a)-1(g), making the election is not considered a change in method of accounting.
 

#14
WEISSEA  
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Oct 2014 EA Journal article:
1. Some Items requiring Form 3115
UOP 184, M&S(186 &187)
2. Some items elected by doing
Current year full & partial dispositions
3. Items requiring election statements
De minimis election($500 or $5000 if have AFS);
Election to capitalize repair and maintenace items on AFS;
Small real property( uner $1M in basis) to treat building expenses as current expense if aggregate lower of under 2% of basis or $10K
 

#15
Coddington  
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Dave,

The de minimis election does not require a Form 3115, but, depending on how the Service polices it, not all small taxpayers can use it. It's one thing if tax is book and another if there is no book. Also, some things aren't covered, like the 200 gallons of freon the tech buys every year or so. That falls under the prophylactic method changes Treasury is pushing.

Edit: Better example so that 12-month financial rule doesn't clearly apply.
Last edited by Coddington on 4-Dec-2014 6:55pm, edited 1 time in total.
-Brian

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#16
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Read the sections on the Revenue Procedures about the Paperwork Reduction Act.

"The estimated number of respondents is 7,330. The estimated annual frequency of responses is on occasion."
http://www.irs.gov/pub/irs-drop/rp-14-16.pdf#page=25

"The estimated number of respondents is 1,600. The estimated annual frequency of responses is on occasion."
http://www.irs.gov/pub/irs-drop/rp-14-54.pdf#page=92


Isn't that saying that the IRS expects less then 9,000 Form 3115's from the Repair Regulations?

If I read the statistics right, there are over 23 million Schedule Cs PLUS millions of other returns with depreciable items (Schedules E, F, corporate and partnership returns). The IRS is only expecting 8,930 Form 3115s.
http://www.irs.gov/uac/SOI-Tax-Stats-Bu ... Statistics


What do you guys think?
 

#17
Coddington  
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I think they are not realistic. McGladrey has made comments to the effect that they are expecting to make changes totaling $45 million in revenue. That suggests a few thousand, at least a couple thousand. Multiply that by just the top eight firms and you've already surpassed Treasury's estimate. There could be APA problems, but when aren't there?
-Brian

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SourceAdvisors.com

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#18
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I agree, those numbers seem quite low, but to me it shows the IRS does NOT expect 3115s from almost every business.
 

#19
Coddington  
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That's not what the people who wrote the regs have been saying, but lowball numbers on respondents is as normal as insanely high numbers on preparing forms. Some of it is driven by APA considerations, which is why they lowball it.
-Brian

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SourceAdvisors.com

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#20
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JR1 wrote:A. That's crazy freakin' work


Yes, just like a lot of things in life and tax law. Although everyone will get faster as we get more experience in it.

B. Who exactly do I bill for that?


The client, probably.

Like they're going to even keep the 3115's.


That doesn't matter. It's the taxpayer's responsibility to prove this in an audit, so not only does it need to be done, but you'd better have that Ogden copy sent certified, return receipt and keep the green card when it comes back. In addition, you can expect that every audit of a business for years will have this near the top of their document request list, and if you've advised your client against doing the 3115s (or, perhaps worse yet, intentionally didn't mention this requirement to him or her) you've just opened up your checkbook for preparer penalties at your client's audit. By putting the $200 election on the return, you've just admitted that you knew about the rules.

At the same time, you're having to answer to your client about how they paid you to do their taxes right and don't understand why it was done wrong.

The IRS isn't usually this clear on what they want. It reminds me of when they made the changes to EIC due diligence a few years back. You wouldn't consider being lax in your EIC due diligence, would you?
 

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