Accounting method changes related to new repair regulations

Technical topics regarding tax preparation.
#361
JAD  
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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.
 

#362
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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?
 

#363
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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.
 

#364
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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.
 

#365
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Ckenefick wrote: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.
 

#366
Coddington  
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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.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#367
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"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.
 

#368
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Why take the risk if filing the 3115 for some client siutations is relatively painless.

Why waste the time?
 

#369
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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.
 

#370
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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.
 

#371
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I will post up my 3115 when I'm done for scrutiny and review; I'm working thru a RMSH right now and may include a 263a-3 method as well. Both are prospective without 481a adjustments.
 

#372
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There seem to be two extreme positions being offered here and in the tax practitioner community — one, that you need not file any Forms 3115 with the returns to adopt the repair regulations, and two, that you need to file a Form 3115 for each business that your clients have, and failure to do so is a Circular 230 violation.

Personally, I think the first position is too risky and the second position is going overboard. So, I’ve chosen an option in the middle because it sounds like the choice that will keep me from being sued for potential malpractice — to file ONE Form 3115 for each client.
 

#373
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I've had two clients with rentals come to mind, that I will be looking at closely, especially under the example that replacing 1/3 of the windows in a building is an expense whereas 2/3 would need capitalization, not to mention all the appliances I've been depreciating.

One item I've a question on is replacing a water heater in a rental. Definitely have to do it more than once over the life of the house. So is it a repair under the new regs? How about my roof: I capitalized it since it is a betterment in that it is a PVC membrane where the old one was tar paper and snokote. However, the new roof was just put over the old one. At a Gear Up seminar last year the consensus was that since the type of roof was improved, it must be capitalized as a betterment. Now I'm not so sure.

Also, how about stuff we used Sec. 179 on that now could be expensed under the safe harbor. Should we file the 3115, so there is no potential recapture?

I've got the Spidell update on Monday. And yes, my head is spinning on this stuff.
 

#374
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Let's say I diligently go through a client's books and find that 8 years ago the business deducted a new roof which I now say should be capitalized. How could this ever be a 481 adjustment? It's too late to amend the 8-year old return so the taxpayer has already deducted the expenditure in full.

If is becomes a 481 item, isn't the taxpayer double-dipping?
Last edited by Taxalmancer on 18-Jan-2015 8:42am, edited 1 time in total.
 

#375
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DaveFogel wrote:There seem to be two extreme positions being offered here and in the tax practitioner community — one, that you need not file any Forms 3115 with the returns to adopt the repair regulations, and two, that you need to file a Form 3115 for each business that your clients have, and failure to do so is a Circular 230 violation.

Personally, I think the first position is too risky and the second position is going overboard. So, I’ve chosen an option in the middle because it sounds like the choice that will keep me from being sued for potential malpractice — to file ONE Form 3115 for each client.


Dave....will any of the 3115s you file have a $-0- 481 adjustment?

I understand how we can go though an existing depreciation schedule to determine if there are items that don't belong on there and should become a 481 adjustment. Are you going through every client's prior years' disbursements to determine if an expense (repair) should have been capitalized to form another 481 adjustment?
 

#376
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Taxalmancer wrote:Dave....will any of the 3115s you file have a $-0- 481 adjustment?


Nearly all of them will.
 

#377
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How could this ever be a 481 adjustment? It's too late to amend the 8-year old return so the taxpayer has already deducted the expenditure in full.

Since we're dealing with an accounting method, we'd be looking at the difference between the deduction claimed and what the lifetime depreciation deductions "would have been" had we capped/depreciated the roof instead. Yes, it's too late to amend, but it's not too late to pick-up a 481 adjustment. IRS would tell you that the normal SOL that applies to most deductions doesn't apply when the deduction pertains to an an accounting method question.

Are you going through every client's prior years' disbursements to determine if an expense (repair) should have been capitalized to form another 481 adjustment?

You would have to in order to comply with these new regulations. So those of you that are filing a 3115 with a $0 Sec 481 adjustment are not complying, nor are you substantially complying, with the new rules (unless you're filing the 3115 to adopt some other aspect of the new regs that doesn't involve a 481 adjustment).

Also, to Dave's point, the one "extreme" side isn't extreme. If one chooses not to file a 3115, he or she isn't saying, "I'm not going to comply." He or she is saying, "It is impossible to comply." Those that file a 3115 with a $0 Sec 481 adjustment are essentially saying the same thing...and their 3115 filing is completely bogus.
 

#378
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Ckenefick wrote:Also, to Dave's point, the one "extreme" side isn't extreme. If one chooses not to file a 3115, he or she isn't saying, "I'm not going to comply." He or she is saying, "It is impossible to comply." Those that file a 3115 with a $0 Sec 481 adjustment are essentially saying the same thing...and their 3115 filing is completely bogus.


When there are well-educated and long-experienced tax professionals out there saying to file Form 3115, even without an IRC §481(a) adjustment, and when there are other well-respected tax experts (like the AICPA) who are saying that failure to file Form 3115 is a Circular 230 violation, people like you who recommend not filing Form 3115 is certainly an "extreme" position.
 

#379
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I find that to be totally hypocritical. The IRS says, "Compute the 481 adjustment...that's what these new regulations require." And you say, "No thanks. For whatever reason, I'm just going to put down a $0 481 adjustment."

To me, you've violated Circ 230 not once...but twice!
 

#380
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and when there are other well-respected tax experts (like the AICPA) who are saying that failure to file Form 3115 is a Circular 230 violation

To that point, you totally misconstrue what the AICPA has said. They're basically saying that the IRS has put practitioners into a position where, often, they simply can't comply. And because they can't comply, that would produce a 230 issue.

The small guy that owns a rental, who was told to maintain capital expenditure records...threw away his "repair" invoices from 15-years ago. This guy can't comply.

The AICPA recognizes that filing a 3115 with a $0 481 adjustment isn't compliance. This is exactly why they have asked for a prospective application of the Regulations.

If you think for a minute that your 3115's with a $0 adjustment will pass muster under these regulations, when we're talking about expenditures associated with a building, you're mistaken. Your 3115 filing is tantamount to not filing one at all. In fact, it is worse than that, since you are making an assertion, in violation of Circ 230, that is patently false.
 

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