Wait! Before you release your client’s business tax return did you consider my Seven Preparer Commandments for 2014 business tax returns?
Once again Congress and the IRS have managed to make the 2015 tax season interesting. Late in December we heard the last quack from our lame duck Congress with the passage of the tax extenders. We accept Congress’s deja vu to 2013 pre-sunset of the expired provisions, however the late passage prevented meaningful planning for our clients. One legislator remarked on the bill’s passage that this “tax legislation has a shorter shelf life than a carton of eggs”.
The IRS’s new Tangible Property Regulations may prove to be a huge preparer stumbling block for the 2015 season. These regs, sometimes referred to as the “repair regulations”, were ten years in the making and are a compilation of tax cases, IRS pronouncements, and IRS letters to Santa! This new approach to business property tax accounting has many tax writers warning that the regulations are almost as complicated as the IRS’s attempt at tax code simplification that resulted in the Tax Reform Act of 1986.
The Tangible Property Regulations have been on quite a journey since their December 24, 2011 debut. I would liken the regulations journey to that of teaching your 16 year-old to drive a car with a manual transmission; bumpy, with frequent jarring starts and stops. As many of you already know, the new regulations became effective for tax years beginning in 2014. The new Regulations made changes to IRC §263(a) and also §162 and many of the changes will be familiar, but some are new. There are some provisions that are elected annually in the tax return (and may require a change in accounting method in the 2014 tax return). Most will need to be made in this tax return. Note: according to the grapevine, the IRS is expecting every business filer with fixed assets to file at least one Form 3115 with change codes 184 and 187.
What does this mean for the tax preparer in 2015? The preparer must review his or her client’s tangible property records for items acquired in 2013 and prior in the light of the new regulations. You must seek out the good, the bad and the ugly items as measured by these regulations. The good in the form of reeling in all the potential tax benefits, the bad in the form of potentially capitalizing items expensed in prior years, and the ugly in correcting prior errors in depreciation (life, method, and bonus depreciation) in your client’s fixed asset records. Be warned the IRS has targeted leasehold improvements, as it believes many taxpayers used the life of the lease instead of 39 years or, if qualified, 15 years (it has its own change code).
To help you through the new regulations, I have listed the changes to be reviewed by the preparer that I think most will need. This is far from an exhaustive list. In keeping with the bible metaphor in the title, I have listed them as Seven Preparer Commandments. Please note: you may be filing an accounting change to continue to do what you have done in the past. Think of it as formalizing your policy in compliance with the new regs. As mentioned above, I believe the accounting method change codes, relating to annual elections, were needed as the variability in electing to apply or not to apply a provision on an annual basis is in and of itself an accounting change. My space is limited so I will assume the reader is familiar with filing a Form 3115 and understands §481(a). If a Form 3115 is required, I have provided the change code and whether the cutoff method or §481 treatment cumulative impact of the change to get you started.
- Thou shall begin your annual review of your client’s material and supplies plus repair parts on hand (rotable) at year end that have an expected life cycle greater than 12 months. Make an annual election in the tax return to expense the $200 per unit expensing safe harbor pursuant to Treasury Regulation section 1.162-3(c) New Reg. §1.263(a)-1(f) . Cut off method will apply, no §481adjustment is permitted. Also look at Form 3115 change code
- Thou shall review your client’s policy for expensing tangible property. Also look at Form 3115 change code 184. The cutoff method applies in year of change.
- Thou shall review client’s material, supplies and spare parts not under de minimis safe- harbor election.. Consider Form 3115 change codes 184, 186,187, and 188. The cutoff method applies in year of change.
- Thou shall review repairs in light of new Regulations. Consider Form 3115 change code The cutoff method applies in year of change. Also consider change codes 196, 205 and 206. §481 applies to this group of changes in year of change.
- Thou shall review your clients fixed assets system for proper method, life, and bonus depreciation. Leaseholds depreciation corrections require change code 199 all other depreciation correction use Code 7. §481 will apply in the year of change.
- Thou shall combine those Form 3115 changes: 184, 186, and 192 can be combined in one Form 3115 as can 184 and 193 for a single building for small business taxpayers.
- Thou shall carefully study the new regulations before filing any business tax returns!
I hope you found this helpful and, with it, my hopes for a less stressful tax season.
Tom Zoebelein serves as tax manager at Pearce, Bevill, Leesburg, Moore, P.C. performing tax research and planning.