Overview of the Final Repair and Capitalization Regulations Sorting - - PDF document

2/17/2015 1

Overview of the Final Repair and Capitalization Regulations

Sorting Out the Confusion and the Myths – The Final Treasury Regulations on Repairs and Capitalization

Roger A. McEowen

Director, Center For Agricultural Law and Taxation, Ames, Iowa

&

Paul G. Neiffer

Principal, CliftonLarsonAllen, LLP, Kennewick & Yakima, WA

Contact Information

• Roger A. McEowen

– mceowen@iastate.edu – (515) 294‐4076 – www.calt.iastate.edu – @CALT_IowaState

• Paul G. Neiffer

– paul.neiffer@claconnect.com – (509) 823‐2920 – www.claconnect.com – @FarmCPA

TaxPlace

• Note:

– Today’s presentation will be archived on TaxPlace where it will be available for viewing by subscribers

• No CE credit offered for viewing after today’s live

presentation

2/17/2015 2

Learning Objectives

 Define a unit of property  Recognize opportunities to deduct expenditures as materials and supplies  Understand tests for requirements on capitalization due to improvements, renovations and restorations  Understand the practical application of the regulations to client situations

2

At the end of this session you will be able to:

Final Repair Regulations

• Final and proposed regulations were issued on Sept. 13, 2013.

– Generally finalize the temp. and proposed regs. issued on 12/23/11 – Regs. issued under I.R.C. §168 (GAA and dispositions) again issued as proposed

• Generally effective for tax years beginning on or after Jan. 1, 2014

– At the earliest, IRS can’t impose the changes established by the regulations until examining return for 2014 tax year – Taxpayers do have the option to early adopt the regulations for tax years beginning on or after Jan. 1, 2012. – Contain some taxpayer‐favorable changes

• De minimis safe harbor
• Routine maintenance safe harbor

New Repair Regulations

• What’s the issue?

– I.R.C. §162(a) allows deduction for ordinary and necessary expenses paid or incurred during tax year in carrying on trade or business, including amounts paid for incidental repairs – I.R.C. §263(a) denies a deduction for any amount paid for new property or for permanent improvements or betterments that increase value of any property, or amounts spent to restore property

2/17/2015 3

Materials and Supplies

• Separate into incidental and non‐incidental

supplies

– Incidental – deducted when purchased as long as no record of consumption kept and expensing would not distort income. Reg. 1.162‐3(a)(2) – Non‐incidental materials and supplies are not expensed until used or consumed. Reg. 1.162‐ 3(a)(1)

Material and Supplies

• What is a deductible material or supply?

– Tangible personal property, other than inventory, used

• r consumed in taxpayer’s business that is…
• A component acquired to maintain, repair or improve a unit of

tangible property and that is not acquired as part of any single unit

• f tangible property;
• Fuel, lubricants, water or similar items reasonably expected to be

consumed in 12 months or less

• A unit of property with economic useful life of 12 months or less
• Item with acquisition cost or production cost of $200 or less
• Property identified in the Fed. Reg. or in the IRB as materials and

supplies

Example

• Alexco provides billing services to its customers. It purchases 50

scanners to be used by its employees. Each scanner costs $150. In the first year, Alexco’s employees begin using 35 of the scanners and stores the remaining scanners for use in a later year – The scanners are materials and supplies under 1.162‐3(c)(1)(iv)

• Alexco may deduct the cost of the 35 scanners used in the

first year (if they are non‐incidental)

• The remaining scanners are deductible in the year first used

in Alexco’s trade or business. 1.162‐3(h), Example 7

– Note: If Alexco had treated all 50 scanners as incidental, then all 50 scanners are deductible at time

• f purchase

2/17/2015 4

Final Repair Regulations

• What about materials and supplies (e.g., tangible

personal property that is used in the taxpayer’s trade or business and is not inventory)?

– Can be deducted when purchased if no record of consumption kept and expensing does not distort income (otherwise deduct when used or consumed) – Query:

• Does the creation of a GAAP financial statement deny the

ability to deduct prepaid farm supplies because it constitutes a record?

Final Repair Regulations – The Big Picture

• Distinguish between amounts paid to acquire or

produce tangible property and amounts paid to improve existing property

– Always capitalize amounts paid to acquire or produce tangible property, unless…

• It qualifies as materials and supplies, or
• It qualifies under the de minimis safe harbor and conforms

to the taxpayer’s annual safe harbor election

– Capitalize amounts paid to improve existing property if the expenditure is a betterment, restoration or adaptation

• Everything else is a deductible repair

§1.162‐3 (Materials and Supplies) §1.162‐12 (Expenses of Farmers)

• Both regs. originated in 1958

– 1.162‐3 has always required that the deduction for non‐incidental materials and supplies be limited to those actually used or consumed during the tax year

• The final regulations did nothing to change this rule

– 1.162‐12

• Farmers can deduct from gross income as necessary

expenses “all amounts actually expended” in carrying

• n the business of farming

2/17/2015 5

Materials and Supplies ‐ Farmers

• However, the treatment of materials and supplies for

farmers has been guided by Reg. 1.162‐12(a) which allows full deductibility for all amounts actually expended in carrying on the business of farming including, e.g., gasoline “if used wholly in the business of farming.”

– Both Reg. 1.162‐3 and Reg. 1.162‐12 originated in 1958. Reg. 1.162‐3 has always required that the deduction for non‐ incidental materials and supplies be limited to those actually used or consumed during the tax year. – Thus, it does not appear that the provisions in the new Reg. 1.162‐3 distinguishing between incidental and non‐incidental materials or supplies will be applicable to farmers.

Materials and Supplies

• Example:

– Pete (cash method farmer) filled his 4,000 gallon diesel fuel tank on December 30. He expects to use the fuel in the next 12 months

• Pete can currently deduct the expense

– Listed as a supply inventory on financial statement – Keeps record of consumption – Can deduct the expense as necessary to conduct farming

• business. Treas. Reg. 1.162‐12(a)
• Note: The same analysis applies to the purchase
• f tires to be consumed in next 12 months

Final Repair Regulations

• Rotable and temporary spare parts are a subset of materials and

supplies, but are not immediately deductible.

– What are they?

• RSP ‐ acquired for installation on a UoP; removable from that UoP; generally

repaired or improved; either installed on the same or other property or stored for later installation

• TSP – parts used temporarily until a new or repaired part can be installed and

then are removed and stored for later emergency or temporary installation

• Options for handling:

– Deduct cost when disposed of (default rule) – Capitalize and depreciate over recovery period; – Deduct when first installed, but record income at FMV when removed with FMV becoming tax basis in the part, and continue that process until ultimately disposed of and any remaining basis is deducted

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De Minimis Safe Harbor Election

• Can elect safe harbor to deduct amounts paid to

acquire or produce tangible personal property up to threshold of $5,000/invoice (or per item if taxpayer has an AFS)

– Must have, at the beginning of the tax year, written accounting procedures treating amounts:

• Paid as an expense for non‐tax purposes, or
• Amounts paid for property costing less than a specified

dollar amount, or

• Amounts paid for property with an economic useful life of 12

months or less

What is an AFS?

• A 10‐K filed with the SEC
• A certified audited financial statement

prepared by an independent CPA

• Financial statement required for federal or

state governmental entity

– Non‐audited FS required for government backed loans (SBA, Farmer‐Mac, etc.) are not AFS

For Taxpayers With No AFS

• Safe harbor is $500

– IRS considering increasing the $500 threshold

• Rev. Proc. 2015‐20
• May not be applicable in time for timely filed 2014 tax

returns

– Accounting policy to expense need not be in writing

2/17/2015 7

Safe Harbor‐Other Points

• Election is made annually by attaching statement to

return

• Amounts deducted under de minimis rule are not

capitalized and are not treated as a material or supply

• “Small equipment”
• Tracked separately on books and records
• Use I.R.C. §179 for excess amounts
• The ability to make or revoke an I.R.C. §179 election on an

amended return has been extended through 2014

• Key Point ‐ Nothing prevents a taxpayer from using an

amount greater than the de minimis amount if it is reasonable and does not distort income

Example‐Incidental Materials and Supplies

• Incidental materials and supplies do not include those materials

and supplies for which a record of consumption is kept

• Example: Ken, a cash method farmer for federal income tax

purposes, fills his 5,000 gallon diesel tank on December 28 (pre‐ paid supply). Because it is a fuel that is expected to be consumed within 12 months, it may properly be expensed if the expenditure does not distort income. Ken lists the diesel gallons as a supply inventory on his financial statement prepared for his bank.

– Although keeping a record of consumption of the diesel appears to cause the inventory of diesel to be a non‐incidental supply preventing deduction until the diesel is consumed, Reg. 1.162‐12(a) allows farmers to deduct from gross income as necessary expenses all amounts actually expended in carrying on the business of farming. – Ken is allowed to deduct the diesel purchased on December 28, even if it hasn’t yet been delivered to his tanks.

Other Points on the Safe Harbor

• Amounts deducted under the de minimis rule

are not capitalized nor are they treated as a material or supply

• All tangible property is eligible for the de

minimis rule except land and property that is

• r is intended to be included in inventory
• For consolidated groups, the election is made

for each member of the consolidated group by the common parent

2/17/2015 8

What is a “Unit of Property”?

• In general, the larger the unit of property, the

more likely it is that it won’t be viewed as a capitalized improvement

– UoP is all components that are functionally interdependent (i.e., placing one asset in service is dependent on placing the other asset in service) – Regs. identify 8 separate building systems that are considered separate UoPs from the building structure

• This means that when replacing components of one of these

systems it will be more difficult to treat as repair expense

Example

• A tractor and its engine, transmission and hydraulic

systems are functionally interdependent. One piece cannot operate without the other. They have no independent function other than operating as a part of a single unit of property, i.e., the tractor. A farm implement (e.g., disk, plow, baler) is independent of the power

• source. The tractor pulling the implement has many

functions other than pulling that specific implement. The implement can be pulled by or powered from any tractor.

– Consequently, a combine and its header are separate units of property, in that headers are interchangeable with like‐model combines and combines are designed to attach various forms of headers (corn row, pick‐up, grain table).

Final Repair Regulations

• For improvements to tangible property…

– Capitalization is required if expenditure is a betterment, restoration or adaptation of the unit

• f property to a new or different use

2/17/2015 9

Repairs

• Taxpayer may deduct amounts paid for

repairs and maintenance to tangible property as long as the amounts aren’t required to be

• capitalized. 1.162‐4(a)

– Examine what needs to be capitalized as an amount paid to improve tangible property in order to determine what can be deducted as a repair

Repairs

• Regs. allow a deduction (safe harbor) for routine maintenance on

tangible property defined as recurring activities that keep a UofP in

• rdinary efficient operating condition (inspection, cleaning, testing

and replacing of parts (with comparable replacement parts) of a UofP)

– Taxpayer expects, at time property placed in service, to perform the activities more than once during property’s class life. Under Rev. Proc. 87‐56…

• Ag Equipment ‐ 10 years
• Single Purpose Ag Structure – 15 years

– For buildings, the taxpayer must reasonably expect at the time it places the building in service to perform the activities more than once during a 10‐year period beginning from the time the building is placed in service by the taxpayer

• “Reasonable Expectation” is the rule, not “actually happens”

Building Safe Harbor for “Small Taxpayer”

• Covers certain amounts paid for improvements and repairs to

eligible buildings

– Taxpayer must have average gross receipts of less than $10 million for the three previous tax years – Eligible building has tax basis, before depreciation, of $1 million or less – Safe harbor allows annual deduction of the lesser of $10,000 or 2% of building’s unadjusted basis for any amounts paid for improvements, repairs, maintenance and similar activities per eligible building

• property. 1.263(a)‐3(h)(1)

– Note:

• Taxpayer can have multiple buildings that use the safe harbor, but if amounts

paid during tax year exceed the $10k or 2% limit for an eligible building, the safe harbor is not available for that building. 1.263(a)‐2(h)(8)

– Annual election by attaching statement to return (include description

• f building(s))
• No Form 3115 required

2/17/2015 10

“Small Building” Safe Harbor

• Example:

– Assume that Penny is a qualified taxpayer. She owns a shop and a machine shed. Each building has an unadjusted basis of $100,000. The shop’s overhead door needed replaced and it cost $2,500 to do so. The machine shed needed new lights and minor roof

• repairs. The lights and roof repairs cost $1,500.
• Safe harbor election not available for shop
• Safe harbor applies to machine shed expenses
• Limitation applied separately to each building

– However, if the overhead door was reasonably expected to be replaced within 10 years, then allowed as routine maintenance expense

Improvements

• These expenditures must be capitalized (I.R.C.

§263(a))

– Any amount for new buildings or for permanent improvements or betterments made to increase the value of any property or real estate, or… – Any amount for restoring property or making good the exhaustion of it for which an allowance is or has been made. 1.263(a)‐1(a).

Improvements

• Always capitalize amounts paid to acquire or

produce tangible property unless…

– The property qualifies as materials and supplies

• r…

– The property qualifies under the de minimis safe harbor and the taxpayer makes the safe harbor election

2/17/2015 11

“Betterments”

• Expense that improves productivity, strength,

quality or output of UoP;

• Is a material addition to the asset (physical

enlargement or increase in capacity)

• Expense that corrects material condition or

defect existing before acquisition or that arose during production

When is an Expenditure a “Betterment”?

• Must compare the condition of the property

immediately after the expenditure with the property’s condition immediately before the circumstances necessitating the expenditure

– Treas. Reg. 1.263(a)‐3(j)(2)(iv)

Betterment ‐ Example

• Bob acquires a new tractor rated at 250 hp.

He pays an additional $20,000 to turbo‐ charge the engine and increase the horsepower to 300.

– This is a betterment

2/17/2015 12

Betterment ‐ Example

• Mike overhauls the diesel engine on his

tractor for $22,000.

– This is simply maintaining the tractor and keeping it in operating condition – Simply correcting for normal wear and tear – The $22,000 is expensed as a repair

Pre‐Existing Material Condition/Defect

• Example:

– Terri Aki buys a store located on land that contains underground storage tanks. The tanks leaked before Terri acquired the property, resulting in soil contamination that Terri discovered after she bought the property. Terri pays for remediation costs

• The remediation costs are treated as a betterment

because they ameliorated a material condition or defect in existence before Terri’s purchase. [See 1.263(a)‐3(j)(3), Example 1.]

Material Increase in Efficiency

• Example:

– Jerry Tall owns a building that is used in his business. An energy assessment shows that adding insulation could significantly reduce the building’s energy costs. So, Jerry hires a contractor to install insulation in the building structure. The new insulation is expected to reduce energy and power costs by 50%

• Jerry must capitalize as a betterment the amounts paid to

add the insulation as it is reasonably expected to materially increase the efficiency of the building structure. [1.263(a)‐ 3(j)(3), Example 21]

2/17/2015 13

Unavailability of Replacement Part Is Not a Betterment ‐ Example

• Farmer Jones owns an older computer with a

200 MB hard drive which crashes. The minimum size replacement available now is 750 MB. The upgrade to 750 MB hard drive is not a betterment due to the unavailability of the same size replacement part

– Treas. Reg. 1.263(a)‐3(j)(2)(iii)

Regulatory Requirement Not A Betterment ‐ Example

• Levi owns a meat packing plant that has oil

seepage in floors. The USDA requires Levi to add concrete floors and lining on the walls. The floor was functional before the seepage.

– The regulatory requirement does not result in a betterment.

– Treas. Reg. 1.263(a)‐3(j)(3) Example 12

What is a “Restoration”

• Restoration must be capitalized if…

– It replaces a component on which taxpayer recognized gain

• r loss on disposition

– If for the repair of damage to a UofP for which taxpayer took a casualty loss – The property is restored to operational status if it has not been functional, or the property is rebuilt to like‐new condition after the end of its class life in the tax system – Replaces a part or a combination of parts that comprise a major component or substantial structural part of UoP

• Facts and circumstances

2/17/2015 14

Replacement Not A Restoration

• Example:

– Roberta owns a building that she uses in her

• business. She pays an amount to replace 30% of

the wiring throughout the building with new wiring.

• 30% of the wiring is not a significant portion of the

wiring major component and does not comprise a substantial structural part of the electrical system.

• Roberta is not required to treat the amount paid for the

replacement as a restoration [1.263(a)‐3(k)(7), Example 21]

Replacement as a Restoration

• Example:

– Vince owns and operates a hotel and wants to refresh the appearance of the public areas by replacing the floors. The floors in the public areas comprise 40% of the square footage of the entire hotel.

• Since the floors in the public areas comprise a

significant portion of a major component (floors), Vince must capitalize the amounts paid for the floors as a

• restoration. [1.263(a)‐3(k)(7), Example 29]

Restoration ‐ Example

• Mike determines that the diesel engine is

beyond repair and must be replaced

– Engine is major component – Expenditure is a replacement – Amount must be capitalized

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Restoration ‐ Example

• Bob replaces all of the disc blades on his disc

– The blades are a major component (no tillage without the blades) – Capitalization required

• Bob also replaces the bearings on another

implement that was still operational

– Not a major component part – Expensed as a repair

Restoration ‐ Example

• Sheila owns irrigation wells. A part of the

well breaks which requires the motor to be pulled off so that the broken parts can be reassembled and the wells put back in

• peration. The total cost of the project is

$25,000

– The costs are associated with a major component

• f the wells pumping system and are restorative
• Capitalization required

Restoration ‐ Example

• Suzy has one span of a 10‐span pivot
• collapse. The span is replace for $15,000,

including labor

– The span was only a small part of the overall pivot and the amount can be expensed as a repair

2/17/2015 16

Restoration Example

• Suzy has four spans of a 10‐span pivot
• collapse. The spans is replace for $60,000,

including labor

– The spans were a major portion of the overall pivot and the amount can shall be capitalized as a restoration cost.

• Note: The Final Regs. appear to indicate

more than a third is a major portion

– Facts and circumstances test

What is an “Adaptation”?

• An “adaptation” must be capitalized if…

– The amount paid is to adapt a UoP to new or different use if the adaptation is not consistent with the taxpayer’s ordinary use of the UoP at the time the taxpayer placed the property in service – So, the cost of adding a feature to an existing machine to adapt it for a new use is a capitalized cost

Adaptation That is not a New or Different Use

• Jenn owns and leases out space in a building

consisting of 20 retail spaces. The spaces are designed to be reconfigured. One of the tenants expands its occupancy by leasing two adjoining retail spaces. To facilitate the new lease, Jenn pays to remove the walls between the three retain spaces. The walls between the spaces are part of the building and its structural components.

– What’s the outcome?

2/17/2015 17

Adaptation Example (cont.)

• The amount paid to convert three retail

spaces into one larger space for an existing tenant does not adapt Jenn’s building structure to a new or different use because the combination of retail spaces is consistent with Jenn’s intended, ordinary use of the building structure. The removal of the walls is not an improvement to the building

– 1.263(a)‐3(l)3), Example 2

Dispositions

• Occurs when ownership of an asset is

transferred or when an asset is permanently withdrawn from use

– Includes sale, retirement, or physical abandonment of asset

• An entire disposition requires recognition of

gain or loss

50

Partial Disposition Election

• Proposed regs. allow taxpayers to elect

disposition rule when it disposes of a portion

• f an asset

– Application was mandatory under 2011 regulations for disposals of structural components

• f a building

– Elective regime does away with need to make GAA election for all buildings – Annual election vs. accounting method change

51

2/17/2015 18

Disposition

• Example

– Angela owns an office building with four elevators. She replaces one of the elevators.

• Since the elevator is a structural component of the building, it is a separate

asset for disposition purposes.

• Angela does not make the partial disposition election
• The retirement of the replaced elevator is not a disposition.
• Angela continues to depreciate it as part of the cost of the building and does

not recognize a loss for the retired elevator

• 1.168(i)‐8(i), Example 1

– If Angela treated each structural component of the building as a separate asset within the fixed asset system, the office building, including its structural components, is the asset for disposition purposes

• Same result as above
• 1.168(i)‐8(i), Example 2

52

Removal Costs

• Costs of removing an asset or a portion

thereof follow the treatment of the asset

– If disposal is treated as a disposition, removal cost are part of the disposition – If disposal is not treated as a disposition, removal costs are deducted or capitalized based on whether removal costs directly benefit a capitalized improvement

53

Handling Removal Costs

• Example:

– Jacob owns a building in which he conducts his retail business. The shingle roof is leaking but the building continues to function in the

• business. A contractor recommends that Jacob should remove the
• riginal shingles and replace them with new shingles. Jacob does not

consider the removal of the old shingles as a disposition.

• Assuming that the replacement of the shingles is not an improvement to the

building structure or systems and does not adapt the building structure or systems to new or different uses, the re‐shingling is not an improvement and is incurred by reason of repair and maintenance

• 1.263(a)‐3(g)(2)(ii), Example 3

– If Jacob treated the shingle removal as a disposition, he would deduct the adjusted basis of the components as a loss. Thus, the amounts paid for replacement shingles must be capitalized as a restoration

• Note: The amounts paid to remove the old shingles are not required to be

capitalized as part of the cost of the improvement, regardless of their relation to the improvement

– 1.263(a)‐3(g)(2)(ii), Example 4

2/17/2015 19

Accounting Method Changes

• Changes to comply with the new regulations

are generally changes in method of accounting to which I.R.C. §§446 and 481, and the associated regulations, apply

Implementation – Rev. Proc. 2014‐16

• Issued on January 24, 2014
• Provides new automatic method changes for final regs.

– M&S, R&M, capitalization of improvements

• Requires taxpayers to comply with final regulations for

first tax year beginning after 2013

• Waives scope limitations in Rev. Proc. 2011‐14 for

changes filed for tax years beginning before 2015

• Changes generally require Sec. 481(a)

– However, some made on a modified cut‐off basis

• Simplified Form 3115 for small taxpayers

56

Implementation – Rev. Proc. 2014‐17

• Issued on February 28, 2014
• Provides new automatic method changes for proposed

regulations – GAA and dispositions

• Allows a late partial disposition election to be treated as

an accounting method change

– Enables taxpayers to claim negative Sec. 481(a) adjustment for past dispositions of building components – e.g., roof or HVAC – Extended for tax years beginning in 2014

• Rev. Proc. 2014‐54

57

2/17/2015 20

Future Partial Asset Disposition

• No Form 3115 filing requirement for a future

partial asset disposition

– It’s an annual election – The election is not a change in accounting method

• 1.168(i)‐8(d)(2)(i)

– 1.168(i)‐8(d)(2)(ii) says that the election for future partial dispositions cannot be made through an accounting method change

• The election to deduct a portion of the basis (the partial

disposition) has to be made on a timely filed original return

• The costs of replacing that which was disposed have to be

capitalized

Late Partial Disposition

• Generally waives scope limitations in Rev. Proc.

2011‐14 for changes filed for tax years beginning before 2015

• Rev. Proc. 2014‐16 – accounting method changes

– Simplified Form 3115 for small taxpayers (but, remember, there must be a change of accounting method before Form 3115 is required)

• Avg. annual gross receipts for 3 preceding tax years of $10
• mil. or less
• Now, even if there is a method change, these taxpayers need

not file Form 3115

– Rev. Proc. 2015‐20

59

Some Thoughts on Accounting Method Changes

• Many seem to think that there is an

expectation from the IRS that no one is currently in compliance with accounting method on repairs and supplies.

• Some are filing 3115 even though there is no

481 adjustment.

– This isn’t necessary

• Especially with the release of Rev. Proc. 2015‐20

2/17/2015 21

Specific Questions

• No required mass production of Forms 3115

– Has the individual farmer established a method of accounting with respect to supplies, capitalization?

• Two consecutive years

– IRS Office of Chief Counsel confirmed last fall that IRS was not expecting mass Forms 3115 for materials and supplies

• Taxpayers with no Form 3115 filing not targeted
• No need to file Forms 3115 to “affirm”

compliance with repair regs

• When would Method Code 187 apply?

61

Method Code #187

• It is for changing to deducting incidental materials and

supplies.

• Can you think of a situation in which a taxpayer could

possibly be in a violation of the accounting method for incidental materials and supplies?

– An incidental material and supply is one in which the taxpayer doesn’t have a record of consumption or take a physical inventory. – Are there any taxpayers that don’t deduct incidental materials and supplies when paid (cash basis) or incurred (accrual)?

• If a farmer deducts ad hoc small tools in some cases and

capitalizes in others, there hasn’t been an adoption of an accounting method.

– Form 3115 not necessary to adopt an accounting method

Additional Thought on Accounting Method Change

• The issue has been way overblown

– Why would a taxpayer, who has been following court opinions

• ver the last 20 years in determining capitalization policy, need

to file Form 3115 to place them in compliance with the Regs.? The Regs. appear to adopt the outcomes of various court cases. Those taxpayers who have been following the cases in adopting principles of compliance should already be in compliance.

• The major exception to this relates to taxpayers who followed the

2008 proposed regulations, which used the entire building as a unit of

• property. The concept of building systems had not been adopted. If

taxpayers have been using the 2008 Proposed Regs. on buildings being the unit of property, a Form 3115 is necessary. Otherwise, in most cases, a Form 3115 is not necessary.

– Taxpayers should review prior capitalization and determine compliance, but this doesn’t require a wholesale filing for virtually every business.

2/17/2015 22

Comments From IRS Office of Associate Chief Counsel (Income Tax and Accounting) Fall of 2014:

• “Barring a situation in which the taxpayer has

taken aggressive positions in the past or has in no way applied an improper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s section 481(a) adjustment now.”

More Thoughts On Accounting Method

• The taxpayer must have adopted an

accounting method in order to change it.

• If an accounting method has not been

adopted, the taxpayer is now adopting the final regulations.

– The adoption of the final regulations is an initial adoption and is not a change in accounting method

• No Form 3115 need be filed

What is an Accounting Method?

• It is something that can be articulated.
• The question for most businesses as to

whether capitalize or deduct a repair is made

• ne‐by‐one, depending on just what was

done

– There is no way to document the accounting method because each major repair is different – Thus, there is no Form 3115 filing requirement because the taxpayer didn’t have a previous accounting method

2/17/2015 23

Further Point on Accounting Method

• Most taxpayers have not established

accounting methods through the filing of their tax returns

• Accounting methods are established when a

taxpayer consistently treats a specific item in a specific way.

– That’s not likely with respect to repairs and supplies

Recent Development

• Rev. Proc. 2015‐20
• No 3115 Filing for…

– Taxpayer with:

• Average annual gross receipts of $10 mil. or less over

the last three years; OR

• Less than $10 million of total assets as of the first day of

the taxable year

– Can elect to make method change on cut‐off basis with no 3115 – Annual elections do not involve a method change

• Rev. Proc. 2015‐20 Possible Expansion
• f the $500 Safe Harbor
• Treasury Department now asking for

comments on raising non‐AFS safe harbor amounts from current $500 level

• Will not happen in time for 2014 tax returns

(March 1, non‐extended tax returns)

• Remember:

– No limit on reasonable repairs – Can have an amount higher than safe harbor

2/17/2015 24

Stay Up To Date on Agricultural Law

Find the Latest on TaxPlace CALT Summer 2015 Seminars

• June 11‐12, 2015

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2/17/2015 25

Thank You!

• mceowen@iastate.edu

– calt.iastate.edu – @CALT_IowaState

• paul.neiffer@CLAconnect.com

– @FarmCPA – www.farmcpatoday.com