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Tangible Property Regulations — IRS Relief for Small Businesses

Berdon Tax Team 02.18.2015 | Client Alert

Last week, the IRS issued Revenue Procedure 2015-20, which significantly reduces the compliance burdens for small businesses relating to implementing the new tangible property regulations. Without this relief, many small businesses would have been required to prepare and file Form 3115 and apply the new rules on a retroactive basis. 

In 2013, comprehensive regulations were issued regarding amounts paid to acquire, produce, improve, or dispose of tangible real and personal property (the “Repair Regs”).  The general perception is that these rules are favorable for real estate businesses and make it easier than previously to deduct items as a repair.

The Repair Regs are generally effective starting with the 2014 taxable year for calendar year taxpayers. The IRS originally mandated that all taxpayers with a trade or business adopt the new rules on a retroactive basis. This was achieved by requiring that the cumulative effect of the Repair Regs in all prior years be shown as an adjustment on the 2014 return if a net deduction resulted.  In the case of net income, the adjustment was to be reported pro-rata over four taxable years.  In addition, the IRS generally required that all taxpayers impacted by the Repair Regs file a Form 3115 with the IRS to report adoption of the new rules and the resulting adjustment.

The IRS Takes Action

The IRS received numerous complaints regarding the need to apply the Repair Regs retroactively and to require the filing of a Form 3115. As a result, the IRS has offered relief to small businesses. For this purpose, a small business is a trade or business that has either (i) total assets of less than $10 million as of January 1, 2014 (for calendar year taxpayers), or (ii) average annual gross receipts of $10 million or less for the prior three taxable years.

Taxpayers with a small business can choose to apply the Repair Regs using a “cut-off” approach. That is, the taxpayer would continue to apply prior rules to pre-2014 transactions and the new rules to 2014 and later transactions. For example, if a taxpayer capitalized costs in 2011 and is depreciating the costs over 27.5 years, the taxpayer would continue to depreciate the costs in 2014 and later taxable years, even though the new rules (had they been in effect) would have permitted a deduction of the costs as a repair in 2011. Be aware that taxpayers choosing the cut-off approach will not be allowed to make a late partial disposition election.

In addition, the IRS has waived the requirement to file a Form 3115 for taxpayers with a small business. The waiver applies if the taxpayer adopts the cut-off approach described previously and first applies the Repair Regs in the 2014 taxable year.

A taxpayer with a small business still has the option of applying the retroactive approach to adopting the Repair Regs. In such case, a Form 3115 would still be required.

If you have questions, contact your Berdon advisor.

Berdon LLP, New York Accountants

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