The tangible property regulations' small business exceptions: to file or not to file?

AuthorStrong, David L.

PREVIEW

* Small business taxpayers have options for implementing the tangible property regulations.

* Taxpayers must consider the trade-off between simplified procedures and audit protection.

* Time is quickly running out for taxpayers to make their decision.

Most small business taxpayers and practitioners welcomed the relief the IRS provided in early 2015 when it issued Rev. Proc. 2015-20. (1) This guidance enables small business taxpayers to adopt the final tangible property regulations (2) using simplified procedures. Although the relief provided by Rev. Proc. 2015-20 is a favorable development, small business taxpayers should be aware of the implications of adopting the regulations through the small business exception.

As discussed in more detail below, eligible small business taxpayers will be deemed to have adopted the tangible property regulations by filing their 2014 tax return even if they do not file Form 3115, Application for Change in Accounting Method. Taxpayers that do not file Form 3115 with their 2014 tax return to adopt the tangible property regulations and do not wish to adopt the regulations by way of the small business exception must include a statement with their 2014 tax return acknowledging they are not adopting the final tangible property regulations under Rev. Proc. 2015-20.

Overview of Rev. Proc. 2015-20

The small business exception permits taxpayers to change their methods of accounting to comply with the final tangible property regulations on their 2014 tax returns without including a Form 3115 or a separate statement. Taxpayers using the small business exception are only required to take into account amounts paid or incurred beginning in the 2014 tax year. Therefore, no Sec. 481(a) adjustment is required. A taxpayer opting to use the small business exception is not granted back-year audit protection for its treatment of expenditures covered by the tangible property regulations.

The relief provided in Rev. Proc. 2015-20 is available only for a taxpayer's first tax year beginning on or after Jan. 1, 2014. Additionally, a taxpayer using the small business exception cannot choose to implement some of the method changes using the revenue procedure and other changes by filing Form 3115 and claiming a Sec. 481(a) adjustment. Furthermore, using the small business exception limits a taxpayer's ability to claim deductions for certain dispositions that occurred prior to a tax year beginning on or after Jan. 1, 2014, by filing a Form 3115.

A taxpayer is eligible for the small business exception if it has one or more separate and distinct trades or businesses (as defined in Regs...

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