Accounting method changes related to new repair regulations

Technical topics regarding tax preparation.
#381
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Ckenefick wrote:To that point, you totally misconstrue what the AICPA has said.


I'm not misconstruing what the others are saying. They're saying, quite clearly, that if you have a client who files a Schedule C, E or F, and you don't file Form 3115 with their 2014 return to adopt the repair regulations, you've violated Circular 230. See, for example, “Implementing the new tangible property regulations”, an article published in the Journal of Accountancy (“if a CPA files a federal tax return for 2014 for a client without a Form 3115 or certain election statements, the CPA could be in violation of Circular 230 and subject to disciplinary action.”).

All I'm saying is that with several well-respected tax professionals out there saying that the failure to file Form 3115 to adopt the repair regulations is a Circular 230 violation, and you on the other side saying that filing Form 3115 with a zero IRC §481(a) adjustment is a Circular 230 violation, my choice is in between --- file the form.
 

#382
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That article didn't mention "Section 481" one single time!

All I'm saying is that with several well-respected tax professionals out there saying that the failure to file Form 3115 to adopt the repair regulations is a Circular 230 violation, and you on the other side saying that filing Form 3115 with a zero IRC §481(a) adjustment is a Circular 230 violation, my choice is in between --- file the form

I know what you're saying. And you're missing the big point here. You're missing what *the IRS* actually has to say on the matter. And they say to compute a 481 adjustment, one way or the other.

several well-respected tax professionals out there saying that the failure to file Form 3115 to adopt the repair regulations is a Circular 230 violation

Again, no mention of a 481 adjustment...If they are suggesting that all you need to do is file a 3115 to be in compliance (which I think you are suggesting, since no mention is made of a 481 adjustment) without the slightest investigation as to whether or not a 481 adjustment might be produced, then they would be incorrect. That's like filing a 1040 with all zeros and saying, "Hey, I filed my return. I'm in compliance." I use the word "slightest," but actually, it would require a full-blown investigation back to Day 1. Many of you are saying, "Well, we have to exercise some common sense here and only go back X number of years," but I'd like to see where the IRS actually says that. An accounting method change analysis doesn't involve analyzing expenditures over just a portion of the period over which the "old method" applied - it involves the entire period.
 

#383
Coddington  
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Please, before continuing this interesting discussion, take a look at the new revenue procedures that came out Friday. They have a great deal to say about section 481(a) adjustments, especially how the adjustments will be treated by Exam. This is new information.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#384
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Why don't you just summarize it for us instead??
 

#385
WEISSEA  
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Just to be clear here, a 3115 must be filed to adopt the new M&S defintion(see previous post on 186/187) and since the M&S rules( the so called $200 rule) are effective for costs incurred on or after 1/1/14, adopting these rules in 2014 results in a $0 481(a) adjustment on the 3115( the so called cut off method).

However, if we are talking about adopting the UOP standards, then a good faith effort must be made at a 481(a) adjustment on the 3115.
 

#386
Coddington  
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My goal is to have a summary up on my blog tomorrow.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#387
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Well, what is the answer to this question?

Has the IRS, in some way, indicated that we can file the 3115 with a $0 and that's good enough?

Have they indicated that we need only go back X number of years?
 

#388
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It's subtler than that. There's a new section that grants taxpayers under examination audit protection for accounting method changes that result in a negative section 481(a) adjustment in the year of change and in the years under audit. There's also a new provision that explicitly provides that redetermining a section 481(a) adjustment is an audit adjustment.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#389
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There's a new section that grants taxpayers under examination audit protection for accounting method changes that result in a negative section 481(a) adjustment in the year of change and in the years under audit.

Are you referring to Page 66 of the -13 Rev Proc?

If so, could you explain the effect of that provision on (1) a taxpayer that doesn't file a 3115 and (2) capitalizes a roof he places in services in 2014, but (3) who expensed a roof he placed in service in 1999 and (4) whose 2014 return gets audited, say, in 2017?
 

#390
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I can't. The underlying facts and circumstances need to be developed.

1) What do you mean by "roof"?
2) Why was it expensed in 1999, including what was the relevant Unit of Property? What work took place and what was replaced?
3) Why was it capitalized in 2014, including what was the relevant Unit of Property? What work took place and what was replaced?

Assuming, arguendo, everything was the same in 1999 and 2014, only disregard of the existing law in 1999 would lead to a repair back then and an improvement in 2014.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#391
JAD  
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Has the IRS, in some way, indicated that we can file the 3115 with a $0 and that's good enough?

Have they indicated that we need only go back X number of years?


Chris, why not just get on board and start figuring out how to efficiently file these forms? Are they going to be theoretically perfect with this law? Of course not. I have 3 corps that go back 30 - 50 years. Of course my review will be limited. If an auditor wants to come and explore what happened 49 years ago, power to him. I'm much more comfortable explaining to the IRS why I inadvertently excluded something from my 3115 than why I simply didn't file - I think that saying, "I would have filed if your rules hadn't been so ridiculous" isn't going to fly.

Does anyone know this: re the $200 rule. If the assets were purchased 10 years ago for $500 and expensed, and if they were 7 year property, then we don't have an adjustment, correct? If the assets were purchased 2 years ago, can we take the position that we would have claimed 179, and therefore we still don't have an adjustment?

Thanks,
 

#392
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Chris, why not just get on board and start figuring out how to efficiently file these forms?

Because it is impossible for any client that has owned real property for any length of time, as I have already stated, numerous times.

Are they going to be theoretically perfect with this law? Of course not.

Maybe state it this way:

"Are they going to be even close to complying with this law?"

No way, not even close, if you file one with a $0 Sec 481 adjustment without a complete analysis of past history.
 

#393
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1) What do you mean by "roof"?
2) Why was it expensed in 1999, including what was the relevant Unit of Property? What work took place and what was replaced?
3) Why was it capitalized in 2014, including what was the relevant Unit of Property? What work took place and what was replaced?


I mean "an entire roof." It was expensed in 1999 b/c taxpayer took the position that the entire building was the UOP. Old roof was removed and an entire new roof was put on. It was capitalized in 2014 under the major component/substantial structural part/restoration tests.

So, how about an answer...instead of referring us to tomorrow's blog?
 

#394
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only disregard of the existing law in 1999 would lead to a repair back then and an improvement in 2014.

No it wouldn't. The "unit of property" definition was always subject to interpretation.

If what you say is true, there would be no need for the IRS to issue these regulations and designate that the UOP rules are applied, for capitalization purposes, to 8 specific building systems.

So, again, how about an answer to the question instead of continue to push this post into circularity?
 

#395
Coddington  
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Expensing an entire roof, from shingles to membrane to decking to trusses to whatever, was an aggressive take on the case law as it existed in 1999. With additional cases in the early 2000s, the waters got muddied further, but in the opposite direction.

If no 3115 is filed and 2013 is still open, the 481(a) adjustment is taken in 2013. If 2014 is the earliest year, the adjustment is taken then. If a 3115 was filed in 2014 with a zero adjustment, then the audit adjustment would be in 2014 even if 2013 is open.
-Brian

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SourceAdvisors.com

Opinions my own.
 

#396
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Ok, thanks.
 

#397
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In Chris's example.....

1) If the 1999 roof did not become an 481 adjustment on a 3115, can the IRS can open up 1999 to review expenditures to seek it out? Isn't it closed by SOL?

Is it fair to say the IRS will be more interested in removing items from existing depreciation schedules (they feel should not have been capitalized) than they will be hunting for previously expensed items that should have been capitalized?
 

#398
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Coddington wrote:I've put together a list of questions on my blog here. Please let me know if you have additional questions I haven't covered.


I just reviewed your list, which is very comprehensive, and I'd like to know a definitive answer to each one. Without those answers, how can anyone file any return, or 3115, without guessing or assuming?
 

#399
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Alright, wanted to circle back with a 3115 that I'm working on right now. I initially wanted to file the 3115 to adopt the RMSH, but as I was working through it, I added some more sections from 162-4 for non routine maintenance as well as the new improvement standards under 263(a)-3. Here is what my 3115 looks like:

Check the appropriate box to indicate the type of accounting method change being requested: Other - 1.162-4, 1.263(a)-3, 1.263(a)-3(I)
Part 1 1a: 184
Part II: All "no" up to box 14. Check yes on box 14, because in this case it will be used in the books
Part II box 16: yes
Part III: blank
Part IV: Line 24: no
Line 25: $0
Line 26/7: no

Schedule A/B/C/D: empty

Attachment for lines 12a-12d:
12a: The taxpayer is changing its method of accounting for repairs and maintenance in accordance with regulation section 1.162-4. Taxpayer is also changing its method of accounting for improvements of tangible property under regulation section 1.263(a)-3
12b: Taxpayer is currently deducting repairs and maintenance when paid. The taxpayer has not incurred any improvement expenses related to tangible personal property
12c: Taxpayer proposes to change its method of accounting for repairs and maintenance to apply regulation section 1.162-4. Taxpayer also proposes to adopt the routine maintenance safe harbor under regulation section 1.263(a)-3(i). Finally, taxpayer proposes to adopt the improvement standards under regulation section 1.263(a)-3
12d: cash

Thoughts/comments? The reason I initially want to file the 3115 is because of the RMSH (this client has a maintenance contract for ultrasound machines they own). However as I was working through it, I thought it was a decent idea to also mention the non routine maint section under 162-4 as well as adopting the improvement standards under 263(a)-3
Last edited by golfinz on 19-Jan-2015 8:52am, edited 2 times in total.
 

#400
HowardS  
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So, I'm following this topic until I'm dizzy. One position is don't file 3115, another is file 3115 with $0 481(a) adjustment.
The vast majority of my clients subscribe to the grocery bag and shoebox school of accounting and it would be impossible for me to determine the proper 481(a) adjustment, but I don't want my clients to miss out on the advantages of the new regs and I can't assume they've always been in compliance. What would happen if I filed the 3115 with $0 481(a) adjustment along with form 8275 stating that the taxpayer's books and records are incomplete and an accurate 481(a) adjustment cannot be calculated? It seems to be a damned if I do, damned if I don't situation.
Retired, no salvage value.
 

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