By John J. Skakun, CPA, Partner
With the finalization and implementation of the IRS’s new tangible property regulations, planning for taxes poses a more serious challenge for many businesses than it has in previous years. The updated code is intended to help tax filers distinguish correctly between legitimate capital expenditures and supplies, repairs, maintenance or other business expenses that are tax deductible.
The Repair Regulations took effect January 1, 2014, meaning that tax years begun on or after that date are subject to the revised guidelines. As a result, many businesses follow policies that are out of compliance for the current tax filing year, but also must implement changes retroactively to comply with the newly clarified rules. Oil and gas industry players are impacted significantly with these changes, as are participants in industries such as utilities, manufacturing, retail and hospitality.
While having a clear, final set of rules that leave no room for confusion is a positive development in theory, millions of business owners and their accountants dreaded filing Form 3115, Application for Change in Accounting Method, which appeared to be necessary in a very high number of cases to avoid running afoul of the final rules. Doing so would have added a burdensome layer of complexity to the record-keeping and tax filing process, creating the very confusion the IRS hoped to reduce and increasing the cost of remaining compliant.
The American Institute of CPAs wrote to the IRS in October of 2014 requesting relief for the administrative burden imposed on small businesses by the new rules. In particular, the organization sought help for taxpayers that would increase the de minimis safe harbor of $500 for small businesses and allow these filers to apply the changes for current and future years, without aligning past years’ returns to meet the current regulations.
Much to the relief of taxpayers and accountants alike, the IRS announced in February of 2015 a revised set of procedures for small businesses, designed to be simpler and easier to comply with. Beginning with 2014 returns filed in 2015, small businesses are permitted to switch over to a different accounting method “on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014” as the AICPA had requested.
What’s more, those that opted for the simplified procedure for their 2014 returns are relieved of the responsibility to file Form 3115. Using the form is still an option available to those who prefer to utilize it in requesting a change of accounting method. Small businesses are defined for the purposes of this regulation as those with assets under $10 million or producing gross receipts no more than $10 million on an annual average basis.
“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” reported John Koskinen, the current IRS Commissioner. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”
The IRS may not be quite done with the issue, either. The agency is seeking comment on the idea of raising the $500 safe-harbor threshold for deducted expenses. The American Institute of CPAs has weighed in with a strong message of support for raising the safe harbor de minimis limit, but the IRS has yet to announce a final decision.
Even with the threshold question still pending, the simplification is extremely good news for small business owners and their tax professionals. However, there is still much to consider when planning for next year’s taxes. Business owners are strongly encouraged to examine their formal capitalization policies and to create one if there is no current written policy.
Given the revisions to tangible property regulations and the changes to business protocol that may be desirable given the new situation, it is more important than ever for business owners to seek knowledgeable business advisory services to help them make smart decisions that will benefit their bottom line. Please contact Hall, Kistler & Company as soon as possible to schedule a consultation to determine your most profitable path forward.