Costs & benefits: what you need to know to comply with the repair regulations.

• Author: Wright, Kathleen K.

Rev. Proc. 2015-20 (I.R.B. 2015-9, Feb. 13, 2015)

In September 201 3, the IRS released final regulations providing rules regarding the tax treatment of materials and supplies and the capitalization of costs of acquiring, maintaining and improving tangible property. These regulations are effective for tax years beginning on or after Jan. 1, 2014. Overall, the rules provide a significant benefit to many taxpayers, but the benefits came with a cost: Burdensome compliance.

Rev. Proc. 2014-16 (I.R.B. 2014-7, Jan. 24, 2014) and other related guidance led many to believe that every taxpayer who filed a depreciation schedule in their tax return would be required to file a Form 3115 (.Request for a Change of Accounting Method) with their 2014 tax returns to properly adopt these rules. Although Form 3115 itself is not that difficult, it does require computing a Sec. 481 adjustment, which effectively restates all prior years to reflect the change in accounting method. After an outpouring of requests for simplification, the IRS released Rev. Proc. 2015-20 (I.R.B. 2015-9, Feb. 13, 2015), which provides the taxpayer with an election that eliminates this requirement. As with any election, there are trade-offs. This article describes the election and its implications.

Qualifying for the Simplified Election

The IRS states in Rev. Proc. 2015-20 that the purpose behind the election is to make it easier for small business to comply with the final regulations. The revenue procedure applies to a taxpayer with one or more separate and distinct trade or business(es) that meet the following test:

* Total assets of less than $ 10 million on the first day of the tax year for which change in method of accounting is effective; or

* Average annual gross receipts of $ 10 million or less for the prior three taxable years.

Total assets are determined by the accounting method that the taxpayer uses in keeping the books and records of the trade or business at the end of the tax year. Gross receipts for each tax year are defined as the trade or business's receipts for the tax year that are recognized under the method of accounting used for federal tax purposes. This includes total sales (net of returns and allowances), receipts for services and income from investments.

Investment income is broader than just what is included in taxable income. It includes interest (including tax-exempt interest), dividends, rents, royalties and annuities, regardless of whether amounts are...