Accounting method changes related to new repair regulations

*Ulterior* motive: A real world example for FStein

It also leads to this:

So IRS does not fix this during the audit but make a positive adjustment to tax for other (non accounting method related) items during the audit. What does the taxpayer then have to do in order to get the negative adjustment that the IRS "overlooked".

What does the taxpayer then have to do in order to get the negative adjustment that the IRS "overlooked".

I don't know, what do you think?

I don't know, what do you think?

I don't know. Can the taxpayer argue for it during the audit and make the IRS do the 481 adj for them or does the taxpayer have to then file for an a change in accounting method and possibly pay the big "user" fee (if the IRS says this is no longer is an automatic change).

DAJCPA, Do you think the answers to your questions are different because of the existence of these TPRs?

Brian, re #445 above - thanks. What would we do without you?

The Service might make the change during the audit or at Appeals. I've had both happen. On one, it was a UNICAP change that should have been a positive adjustment, but, after some unlikely facts came to light, was negative. The agent kept his word and pushed the adjustment through on exam. Alternatively, the taxpayer can file method changes during audit in some circumstances. Or they can wait until the audit ends.

DAJCPA, Do you think the answers to your questions are different because of the existence of these TPRs?

No. The fact that the changes are now automatic (no user fee) and may not be in the future warrants my inquiry. What I getting at is, if the taxpayer does nothing now for negative adjustments can they just wait and have the IRS make the adjustment for them during audit thereby avoiding the 3115 and possible user fee. And if never audited, they still get their depreciation over time.

I just read this entire thread over the past 2 hours as I try to figure out the best path for my clients. The following are items that are unclear to me:

1) Does a 3115 need to be filed simply to accept the new repair regs as an administrative task like checking a box that says you've read a software user agreement before you can click Next during the installation? I can see that might be the case because the new regs are mandating new rules that TPs couldn't possibly have followed in the past and that following them now requires a change in accounting method which must be approved (even if automatically) by the IRS. If this is the case, it seems the IRS could have just automatically approved its own changes without requiring a form to be filed when the TP has no choice.

2) For the small TP with a rental prop or a service-oriented Sch C business, couldn't a 3115 be filed to adopt the new repair regulations, but with a $0 481(a) adjustment because they don't have any items that were expensed when they should have been capitalized, and any items they capitalized that should have been expensed were treated as Sec 179 expenses?

3) I can't help but wonder about this one... what in the world are the millions of Turbo Tax users going to do here? Is Intuit going to guide everyone who owns a rental or has a little side-business to file a 3115 or will they admit their software isn't capable of filing taxes in that situation? Or will they take the approach that no 3115 needs to be filed unless the user answers "yes" to an interview question asking if they mistreated a rental / business expense / asset in the past? What about the mass TRPs like HRB and Jackson Hewitt? Any idea what they're telling their clients to do?

4) Does anyone have a list of states that have adopted the new repair regs and those that haven't? I'm just thinking of the huge mess of adjustments this is going to cause if we make 481(a) adjustments, wipe assets off the depreciation schedules, and then still need them on those schedules for many state returns. Some states are already a mess due to non-conformity in depreciation methods, Sec 179, etc. I can't imagine the software being set up to deal with that for this filing season (hopefully I'm wrong).

5) Finally, again for the mom & pop TP who doesn't have financial statements, written policies, etc., what do you recommend having them do with regard to accounting methods, accounting policies, etc.? Is the IRS saying that every taxpayer, no matter how small, needs formal policies and procedures in place to determine the consistent treatment of all repairs, improvements, (RABI), etc., eliminating the case-by-case / facts & circumstances way that the average person made a decision to capitalize or expense and expenditure in the past?

In addition to this thread, this link is a good reference. It confirms what the pros here have said. No reason to file form 3115 if you are making the De Minimis Safe Harbor election because it is not a change in accounting method.

http://mcgladrey.com/content/dam/mcglad ... ons_qa.pdf

Here are some questions. Let's say a rental owner makes the De Minimis Safe Harbor and Small Taxpayer Safe Harbor elections, how does he account for the following expenses on a rental property with an $80,000 basis, which rules guide the accounting of these transactions?

1. Pays a company $775 for a termite treatment?
2. Buys and installs a new dishwasher for $300?
3. Pays to have a roof replaced for $4,500?
4. Replaces the coil in a heat pump for $800?

How do the expenses above $500 get accounted for?

The effective date for the M&S changes, (unless early adopted):

1.162-3(j) Effective/applicability date—
(1) In general. This section generally applies to amounts paid or incurred in taxable years beginning on or after January 1, 2014. However, a taxpayer may apply paragraph (e) of this section (the optional method of accounting for rotable and temporary spare parts) to taxable years beginning on or after January 1, 2014. Except as provided in paragraphs (j)(2) and (j)(3) of this section, § 1.162-3 as contained in 26 CFR part 1 edition revised as of April 1, 2011, applies to taxable years beginning before January 1, 2014.

You'll find the same info in the rev procs.

As for late PDEs only being for 2012 and 2013, that is partially true. The regulations only provide for late PDEs for those years. The rev proc (RP 14-16) expanded it to all prior MACRS years.

Maybe I'm dense or something but Cod can you explain this a little more. All the regs say towards the end ''...this section applies to taxable years beginning on or after January 1, 2014...". But really we have to apply them to all past years as well and make a change in accounting method, supposedly. How do we tell? It is the phase "applies to amounts paid or incurred" that makes 1.162-3 prospective only?

In addition to this thread, this link is a good reference. It confirms what the pros here have said. No reason to file form 3115 if you are making the De Minimis Safe Harbor election because it is not a change in accounting method.

http://mcgladrey.com/content/dam/mcglad ... ons_qa.pdf

Here are some questions. Let's say a rental owner makes the De Minimis Safe Harbor and Small Taxpayer Safe Harbor elections, how does he account for the following expenses on a rental property with an $80,000 basis, which rules guide the accounting of these transactions?

1. Pays a company $775 for a termite treatment? Ordinary and necessary bus expense. Not effected by new regs
2. Buys and installs a new dishwasher for $300? Expense under DMSH but also goes towards the SHST cap
3. Pays to have a roof replaced for $4,500? Entire roof replacement? If so, restoration and capitalize. Will go toward SHST cap if capitalized or expensed as repair
4. Replaces the coil in a heat pump for $800? Is this a major component of the pump? Was it replaced during routine maintenance

How do the expenses above $500 get accounted for?

Your cap for the SHST is 1,600 (80,000 x 2%) and based on the above you can't elect it because the sum of the expenditures for repairs/maintenance/improvements/DMSH is greater than the cap.

Maybe I'm dense or something but Cod can you explain this a little more. All the regs say towards the end ''...this section applies to taxable years beginning on or after January 1, 2014...". But really we have to apply them to all past years as well and make a change in accounting method, supposedly. How do we tell? It is the phase "applies to amounts paid or incurred" that makes 1.162-3 prospective only?

That's right. We can find a good example at the end of the -3 regs:

(r) Effective/applicability date—
(1) In general. Except for paragraphs (h), (m), and (n) of this section, this section applies to taxable years beginning on or after January 1, 2014. Paragraphs (h), (m), and (n) of this section apply to amounts paid in taxable years beginning on or after January 1, 2014. Except as provided in paragraphs (r)(2) and (r)(3) of this section, § 1.263(a)-3 as contained in 26 CFR part 1 edition revised as of April 1, 2011, applies to taxable years beginning before January 1, 2014.

(Note: In this section, "paid" means "paid or incurred".)

The Service might make the change during the audit or at Appeals. I've had both happen. On one, it was a UNICAP change that should have been a positive adjustment, but, after some unlikely facts came to light, was negative. The agent kept his word and pushed the adjustment through on exam. Alternatively, the taxpayer can file method changes during audit in some circumstances. Or they can wait until the audit ends.

What if the other audit changes had nothing to do with acctg method changes and 481. Can you still ask for a 481 adj during audit for the painting expense that the IRS "overlooked" or is your only option to file a 3115 for a method change during/after audit.

Here are some questions. Let's say a rental owner makes the De Minimis Safe Harbor and Small Taxpayer Safe Harbor elections, how does he account for the following expenses on a rental property with an $80,000 basis, which rules guide the accounting of these transactions?

1. Pays a company $775 for a termite treatment? Ordinary and necessary bus expense. Not effected by new regs
2. Buys and installs a new dishwasher for $300? Expense under DMSH but also goes towards the SHST cap
3. Pays to have a roof replaced for $4,500? Entire roof replacement? If so, restoration and capitalize. Will go toward SHST cap if capitalized or expensed as repair
4. Replaces the coil in a heat pump for $800? Is this a major component of the pump? Was it replaced during routine maintenance

How do the expenses above $500 get accounted for?

Your cap for the SHST is 1,600 (80,000 x 2%) and based on the above you can't elect it because the sum of the expenditures for repairs/maintenance/improvements/DMSH is greater than the cap.

Follow up questions.

So I'm above the SHST cap of $1,600, so then which procedure do I follow for that year? Do I have to change my accounting method to something, and file a 3115? If so, to what?

So I'm above the SHST cap of $1,600, so then which procedure do I follow for that year? Do I have to change my accounting method to something, and file a 3115? If so, to what?

If your out of the SHST, then you have to follow the Betterment, Replacement and Adaptation rules (some call these the RABI or BAR rules) in §1.263(a)-3. The STSH is not a method of accounting and using in one year and not the next does not require a 3115.

I apologize if this was already answered...

Golfinz wrote: Here is what my 3115 looks like:

Check the appropriate box to indicate the type of accounting method change being requested:

Don't you want this to be an advance consent request, and if so you would not check the other box on page 1??
Or did you mean page 2, part 1 other box?

I meant the question that's in the general info section before Part I. I just answered my own question though (unless someone corrects me lol):

Per the instructions:
Type of Accounting Method Change:
Other. For advance consent requests, check this box if neither of the above boxes applies to the requested change. In the space provided, enter a short description of the change and the most specific applicable Code section(s) for the requested change....For automatic change requests, this informational requirement is satisfied by properly completing Part I, line 1 of Form 3115.

So under these new TPR automatic changes, we check the "other" box and leave the line blank. Then we put the DCN number on Part 1 Line 1

I meant the question that's in the general info section before Part I. I just answered my own question though:

Per the instructions:
Type of Accounting Method Change:
Other. For advance consent requests, check this box if neither of the above boxes applies to the requested change. In the space provided, enter a short description of the change and the most specific applicable Code section(s) for the requested change....For automatic change requests, this informational requirement is satisfied by properly completing Part I, line 1 of Form 3115.

So we check the "other" box and leave the line blank. Then we put the DCN number on Part 1 Line 1

The Other box is for advance consent requests. These changes are Automatic Change requests. Those are two separate things according to the 3115 instructions. It's confusing what to mark here - I've seen some people say to not check any of the three boxes and I've seen some that marked the Depreciation and Amortization box which doesn't seem right.

You don't need to check the "Other" box on automatic change requests. Some firms and practitioners still do, because it is easier for human reviewers.

You don't need to check the "Other" box on automatic change requests. Some firms and practitioners still do, because it is easier for human reviewers.

Good to know, thanks.

Side note for myself, why do the instructions say to check it but not write a brief description?