[pickenspolitics]

I have an individual client that is filling out a 1040. He owns 11 rental properties, so he has an extensive schedule E.

We are electing De Minimis Safe Harbor and Small Taxpayer Safe Harbor only. On form 3115 we are filling out Part II, Part IV and Schedule E because he is changing his depreciation method. Does that sound right so far?

What is the code for his change in method?

Do we have to file a 3115 for each of his 11 rental properties? Or only one 3115 for all properties?

We are keeping it simple and not going back (we capitalized all expenses -- from dishwashers to roofs -- with a life more than one year). We are starting the new methods as of of 1/1/14, so do we have a zero 481(a) adjustment?

Does anyone have a good example of a 3115 filled out for a client like this?

Alex

[Ckenefick]

What depreciation method are you changing to?

[Whestsider]

Sorry in advance for this post but my head is spinning. It appears that the focus is mainly on real estate regarding the change of accounting issue. It looks like the consensus is that a Form 3115 must be filed whether there is a 481 adjustment or not to cover our tails? Most of my clients are very small with no 481 adjustment. I understand that specific depreciable assets that do have an adjustment must be listed on Schedule E, line 7 (If the property is currently treated and/or will be treated as depreciable or amortizable...). But do I also list ALL assets with NO adjustment (depreciable real and depreciable personal- I am assuming the change number 184 includes both personal and real) on Line 7 of Schedule E? That would be a time consuming nightmare! If the taxpayer has no 481 adjustments, then the Form 3115 becomes an "affirmation" filing rather than a request form and the instructions just don't cover the "affirmation" filing of this form. Moving forward, if in fact the "no adjustment assets" are not required to be listed individually and there are no "adjustment assets", what do we list on Line 7 of Schedule E? Leave it blank? Write "to comply with new regulations? Again, I am truly sorry for this post and thanks in advance for any guidance.

[Coddington]

Whestsider,

Please note my comment above about not saying anything until I've had a chance to read the new revenue procedures that came out Friday. It will take a couple of days for everything to gel under the new rules, to the extent there are any changes.

[Whestsider]

Thanks a bunch!

[Ckenefick]

It looks like the consensus is that a Form 3115 must be filed whether there is a 481 adjustment or not to cover our tails?

Very debatable.

[WEISSEA]

"Does anyone have a good example of a 3115 filled out for a client like this?"

I am right on track with your thinking for my small residential rental clients. Proseries has the 1.263(a)-1(f), 1.263-3(h), and 1.263-3(n) if want, elections built in where I just check a box in the s/w. So its now just finding a filled out 3115 for M&S safe harbor 186 and 187 that I can e file the pdf and attached to the return. No 481(a) adjustment. Then I just print a 3115 copy and mail to IRS just like I do for the 8949 brokerage statement with stock basis.

[Ckenefick]

So its now just finding a filled out 3115 for M&S safe harbor 186

Can you provide more details on that?

[FSteinCPA]

I agree with everyone else about the excellence of the letter. The unfortunate thing is that the amount of time it took you to write the letter is the same amount of time you will have to sit with and explain it to many clients.

Fun fun fun, I'm gonna sit back and wait for you guys and gals to figure this stuff out.

And EZTax, some of us here have been stating that from the beginning. That not everyone will require a 3115. Interpretations and all.

The link below is something that was shared in a seminar. The IRS has drawn it up but it is not posted on their website yet.

Please take note of the final bullet point. This has been my belief from day one. The purpose of these regs are geared towards to the Big 4 clients taking very aggressive positions with these items and this was never ever designed for the smaller clients with less than 10 million in revenue.

https://www.dropbox.com/s/a6shbwa9y4lgp ... s.png?dl=0

[WEISSEA]

"Can you provide more details on that?"

I want to cover my Schedule C clients with a e filed 3115pdf as well as the Schedule E clients.

Change number 186 non incidental M&S: An inventoriable item is any item either purchased for resale to customers or used as a raw material in producing finished goods. For cash method taxpayers, inventoriable items may be treated as nonincidental materials and supplies.

[JAD]

Taxalmancer,

Why wouldn't the $7,000 be a 481 adjustment reported on the 3115 and spread over 4 years?

I could swear that I read in multiple places that that was one of the benefits of filing the 3115 timely - you get to claim the deduction this year. If the filing is late, it will be spread over 4 years. If I'm wrong, I trust that one of the experts will let us know.

[Ckenefick]

Change number 186 non incidental M&S: An inventoriable item is any item either purchased for resale to customers or used as a raw material in producing finished goods. For cash method taxpayers, inventoriable items may be treated as nonincidental materials and supplies.

What are you saying, that your clients have never complied with this rule in the past?

[JAD]

Alex,

We are keeping it simple and not going back (we capitalized all expenses -- from dishwashers to roofs -- with a life more than one year). We are starting the new methods as of of 1/1/14, so do we have a zero 481(a) adjustment?

On the basis of what? I'd like to do the same with my clients, but that seems to be out of compliance with these very specific rules.

[Ckenefick]

but that seems to be out of compliance with these very specific rules.

A point already made by me and Coddington.

I think a bunch of folks are just filing these 3115's so that they can say they filed them.

[pickenspolitics]

What depreciation method are you changing to?

I have been using straight line depreciation and I have been doing that for all property with a life greater than 1 year. So in the past I've been depreciating roofs, HVAC units, windows, appliances (even a dishwasher that cost me $298).

Now under the safe harbor election, it looks like I can just expense all that is under $500, and I have to depreciate everything costing more than that, correct?

Last edited by pickenspolitics on 17-Jan-2015 3:11pm, edited 1 time in total.

[Coddington]

The rules on 481(a) adjustments have changed a little. Negative 481(a) adjustments are taken into account in one year. Positive adjustments initiated by the taxpayer are spread over four years, unless various exceptions apply. Positive adjustments initiated by the Service at the Exam level are generally taken into account in one year.

[WEISSEA]

"What are you saying, that your clients have never complied with this rule in the past?"

I would like to make sure that all 186 & 187 M&S going forward qualifies for the safe harbor, so I file a 3115 with no 481 adjustment. Alternatively, I can not file the 3115 , and if audited, argue that no change of accounting was required as this is how you'd always done it and it is reasonable under the facts and circumstances. Why take the risk if filing the 3115 for some client siutations is relatively painless. Besides the IRS is expecting a lot of 3115's and I don't want to disappoint them.

[Ckenefick]

Why take the risk if filing the 3115 for some client siutations is relatively painless.

Why waste the time?

[JAD]

I started working on my own and then stopped because I had to get organizers out. I think for the simple, small business, it will take longer to determine and document the position that we don't need to do it rather than just do it - once we've worked through the first one.

[Ckenefick]

I think for the simple, small business, it will take longer to determine and document the position that we don't need to do it rather than just do it

Neither of those two options is what Weiss' post was about. He's saying his client was already complying with the non-incidental supplies rules. So, filing a 3115 in that case really does nothing in that case. There is no risk. And I don't think this is one of those changes that is done on a cut-off basis. So, if you simply file it with a $0 481 adjustment, and there is a risk, you haven't complied with the new rules.