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IRS Repair Regulations Relief? Don’t Celebrate Just Yet.

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A new Revenue Procedure was recently released in an effort to relieve the burden that the Tangible Property Regulations (TPRs) have caused for “Small Business Taxpayers.”  Specifically, these taxpayers may now adopt the TPRs for taxable years beginning on or after January 1, 2014 without filing Form 3115, Application for Change in Accounting Method.  A small business taxpayer is defined as having assets less than $10 million as of January 1, 2014 or average gross receipts over the prior three years of less than $10 million.  This applies to the taxpayer itself or separate businesses owned by the taxpayer.

The goal of the TPRs is to help taxpayers answer the following question “Should costs incurred in acquiring or improving tangible property be capitalized or expensed as repairs and maintenance?” To answer this, the costs will be put through a series of tests.  The TPRs also provide the ability to make annual elections that allow taxpayers to write off certain expenditures when acquiring or producing property.  Finally, they also provide the ability for a taxpayer to make a partial disposition election on certain assets.

While this change appears to lessen small taxpayer burden, a taxpayer that relies on this relief is potentially ignoring the following important features of the original regulations:

  1. Taxpayers that do not file Form 3115 do not get audit protection for prior tax years that may still be audited under the IRS statute of limitations.  For example, if an improper depreciation method was used in these years, including bonus depreciation and Section 179, the IRS could propose a significant tax adjustment if the tax return was under audit.
  2. Taxpayers are allowed to perform depreciation schedule “Scrubs” whereby taxpayers have a one-time opportunity to apply the Tangible Property Regulations to pre-2014 assets and potentially generate significant tax deductions.  These deductions could result from improper depreciation lives, assets that should be expensed as repairs and maintenance under the new standard, or the ability to make a partial asset disposition for these assets.

As always, please consult your tax advisor regarding the above.  Below is a link to Revenue Procedure 2015-20.

http://www.irs.gov/pub/irs-drop/rp-15-20.pdf

In addition, see below for recently issued IRS FAQs regarding the TPRs.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations


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