New repair regs

[frazzled]

I don't know about anyone else, but the new repair regs and the "need"(?) for a Form 3115 are making my life miserable.  How are you feeling about it?

[Terry D EA]

I'm a little in the dark here. I have been looking for information regarding what you are talking about. By your post I am assuming you are talking about the difference between a repair or a capitalization that improves the property??? Miss classification of those items in the past and if so, this would give need to the 3115? Please give me a link to visit.

 

Thanks,

[frazzled]

Check out this link from another tax forum for a great discussion on this matter:

http://www.taxprotalk.com/forums/viewtopic.php?f=8&t=1621

 

also check out Rev Proc 2014-16:

http://www.irs.gov/pub/irs-drop/rp-14-16.pdf#page=25

 

And Rev Proc 2014-54:

http://www.irs.gov/pub/irs-drop/rp-14-54.pdf#page=92

 

Of course, when I read the regs, my eyes glaze over and I start drooling because my brain has turned to mush! 

[frazzled]

Sorry, the link I gave sent you to the bottom of the rev procs - please scroll to top of rev procs.  I could not edit the links.

[Lion EA]

Those that followed the old rules are not compliant with the new rules.  So, those supplies and repairs that were over $200 ($500 if elected at the beginning of a tax year, but who knew to do that two years ago?) should be on the depreciation schedule.  And, that expensive roof repair that's being depreciated may be a repair after all and need to come off the depreciation schedule.  Both those cases need 3115 (or an amended return if recent enough).  Once a client is under audit, it's too late to file 3115.  Form 3115 is due by the filing date, including extensions, of 2014 tax returns.  I'm going to put a lot of clients on extension to buy time to do the best for my clients.  And, to see where the understaffed IRS will go with this.  (If it were me, I'd audit biz returns, including schedules C, E, and F, without 3115s -- low hanging fruit.)  I hope this is not a pet project of the IRS, because I have never filed a 3115 except in classroom situations.  Have taken hours of classes and read tons of texts and those Rev Procs that make your eyes glaze over.  Have a stack nearly a foot high to re-read from courses and forums and such this month.  Heard of some large firms that have their backroom interns churning out generic 3115s to slap on every tax return.  I find this much scarier than ACA, at least for my clients.

[frazzled]

In the past five years or so, we would S179 or depreciate anything over $200. So I guess, no 3115 needed for this.

 

What I have a big problem with is scrubbing the prior years and checking every repair that had been previously expensed. That is a nightmare. I do not do my clients books, they come in with totals. Although with repairs, I have always questioned large totals and will break those down if needed. 

 

I can understand the need to look at items on the depreciation sched that maybe should have been expensed and doing a Form 3115 to correct those. After all, money back in their pocket makes me look good.

[michaelmars]

some people [lecturers] are recommending to adopt the new regs going forward and not back, since this would be a near impossibility.  I haven't decided what I am doing but no matter what, the client will be signing off on what is done in my engagement letter.

[jklcpa]

In the past five years or so, we would S179 or depreciate anything over $200. So I guess, no 3115 needed for this.

 

What I have a big problem with is scrubbing the prior years and checking every repair that had been previously expensed. That is a nightmare. I do not do my clients books, they come in with totals. Although with repairs, I have always questioned large totals and will break those down if needed. 

 

I can understand the need to look at items on the depreciation sched that maybe should have been expensed and doing a Form 3115 to correct those. After all, money back in their pocket makes me look good.

 

I have the same concerns about the scrubbing and especially concerned about the repair bills. How far back are some of you really planning to check these?  I am much more worried about looking at those repair bills for my clients than I am about the ACA.

 

I don't know if you are correct about not needing the 3115 if the asset has been fully depreciated via sec 179 or the years of 100% bonus depreciation though. I was just looking over the instructions for the form 3115 again last night and one of the questions asked on that form is if any of the assets being scrubbed were previously expensed under any provisions such as these, and to attach a detailed schedule.

[Terry D EA]

Okay I entered my responses to the poll. After looking at the links, my initial assumptions were correct. All of my rental clients and Sch C clients that have tangible assets, startup costs; etc have been classified properly so I don't anticipate filing the 3115. I may suggest to one client who engages in rental activities as a partnership to change the method of accounting to accrual to record rental income losses for the year and later recovery. This client has 12 properties as a partnership and 7 individually so the change would benefit them. I will research further before I suggest the change.

[KEYWEST_RICKS]

i would think there will be huge errors on this issue.   along with the elections related to rotable parts, expensing amounts under $500 etc.

 

this almost seems like something the irs will use this years down the line as a slam dunk to hit any client under audit.

[Lion EA]

What about that partial roof replacement that's still on the books but a decade later the whole roof was replaced?  I just got a new client with pages and pages of his depreciation schedule, every line reading "equipment."  Does he have three furnaces still being depreciated?  Dozens of computers, many now in the hands of his children?  He's an artist and has no idea.  Extensions.  Lots of extensions to give me time to ask lots of questions.

[SaraEA]

I got a little clarity on this at a seminar this weekend. (Note I said a little.)  The rules in effect when you expensed/capitalized an item are still applicable, so no need to change accounting methods.  The new regs are effective Jan 2014 but can be elected for 2013 and 2012.  If you choose to do that a 3115 will be needed.

 

The $500/$5000 election to write off acquisitions as current expenses is an ELECTION, made on the tax return each year.  No 3115 needed (unless you choose to apply these rules to 2012 and/or 2013).  And you don't have to take the election if, for example, the client had a bad year in business and doesn't need it.  I believe but am not as sure that the same thing goes for building systems and spare parts.  You must use the new regs for 2014 forward but don't have to change anything for prior years.

 

There is still a lot of controversy over this, with some lawyers talking about suing already and the accounting associations are not all in agreement.  We must wait for clarification from the IRS to be sure.  My reading of the regs is that anything that is an election does not require a 3115.  Now we just have to figure out which are elections and which are mandatory.

[jklcpa]

In addition to the rev procs and other links above, I'll add this 44-page summary from Wolters Kluwer CCH issued this past May on the subject that is available on the internet.  I saved it to my desktop earlier this year and plan to go through it again this coming weekend.  It is written in a way that is easier to understand than some of the other writings I've seen, and it has some very good charts. There's one on the last few pages that summarizes the form 3115 change numbers to use, the general topic those numbers relate to, their specific purpose, and the related tax regs for easy reference.

[Richcpaman]

I just went to a TaxSpeaker seminar and Bob Jennings stated that he did not believe that a 3115 was required for all the entities.

 

If you never made an election before, and as Frazzled stated, we Sec179 everything, so we are just going to add the election each year going forward.  And that is what Jennings recommended.

 

Rich

[jklcpa]

I just went to a TaxSpeaker seminar and Bob Jennings stated that he did not believe that a 3115 was required for all the entities.

 

If you never made an election before, and as Frazzled stated, we Sec179 everything, so we are just going to add the election each year going forward.  And that is what Jennings recommended.

 

Rich

 

Rich, I don't think that not filing the 3115 is the best course of action if you scrub the depreciation schedule, even if they have zero basis due to sec 179. I think the IRS expects some of those 3115s to be filed with a zero 481(a) adjustment.

 

In the blog that Frazzled linked to in her first post, a moderator named "Coddington" posted (post #4 in that blog) to refute that statement from Jennings. Take it or leave it, but here's is what he posted:

 

Sorry, but Bob Jennings is wrong. Scott MacKay (then of Treasury) actually went out of his way at the 2014 ABA Tax Section Mid-year meeting to address some of the misinformation Jennings has been spreading. It's rare to hear a governmental panelist so upset by what's going on in the marketplace.

The only time a Form 3115 would not be necessary is if the taxpayer has never had any repairs or improvements, has no materials or supplies impacted by the new regs, and so on. (This always happens with new taxpayers, such as via a valid 351 drop-down.) In applying section 446, every circuit that has ruled on the issue agrees that taxpayers must file method changes even when going from an impermissible method. (The 10th Circuit had a different approach applying the predecessor statute from the '39 Code, but the revised language of section 446 trumps that approach.) Changing its long-standing regulations for ambiguous statutes, even if contrary to prior judicial precedents, is within the power of Treasury in the post-Mayo world. So any year that a taxpayer has material, supply, repair, improvement, or other costs that are treated differently under their current method and under the new regs, the taxpayer would need to file a Form 8725-R. Now, from a practical standpoint, many small taxpayers will be able to use the new de minimis safe harbor and the new small taxpayer safe harbor and avoid most issues going forward.

From this perspective, the filing of Forms 3115 with zero-dollar section 481(a) adjustments, prospective application of the regulations as of 1/1/14, and use of the safe harbors is generally the safest course. Treasury and Chief Counsel have been going around saying that review of section 481(a) adjustments is a Field issue and no one is aware of a situation where the lack of a negative adjustment unwinds an otherwise valid method change. The problem for many small clients, however, is that if there is no method change, they reported repair expenses on their pre-'14 returns, and they have no improvements on their fixed asset records, the Service might dig deeper and come up with a positive section 481(a) adjustment. So you'd need to do a risk analysis for your clients to see whether they are exposed or have an opportunity under the regs. Of course, for many small clients, like those that use most property management companies, you won't even have enough info to apply the de minimis and small taxpayer safe harbors, so you'll have to look at the regs (and method changes) for other options.

-Brian

Tax accounting methods and credits consultant for hire.

http://www.coddingtontax.com

 

[Abby Normal]

I plan on customizing the 3115 master form so when I do need to use it, it will mostly be filled in. Will do the same with elections if ATX doesn't include them all.

 

Every landlord will need a 3115 for the new 2% or $10k expensing of improvements. Businesses will be on a case by case basis.

[BobH]

Does or will ATX provide a safe-harbor election statement?

 

[Lynn EA USTCP in Louisiana]

Yes, ATX does have the de minimus safe harbor election statements.