AICPA Addresses Escalating Concerns Surrounding Repair and Capitalization Regs.

(Parker Tax Publishing February 11, 2015)

UPDATE February 13, 2015: The IRS has ended much of the confusion over form 3115 filing requirements and small businesses have been granted major relief. Download Rev. Proc. 2015-20 (2/13/2015) waives the requirement for small businesses to file a Form 3115 and instead allows them to opt for a simplified procedure for changing accounting methods under the final repair regulations. Such changes can be made on a prospective basis for tax years beginning in 2014 (a.k.a. "the cut-off method"). The revenue procedure also invites comments on raising the de minimis safe harbor above the present $500 threshold. For purposes of Rev. Proc. 2015-20, a "small business" is defined as one with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years.

The AICPA released a statement to its members this week addressing growing anxiety about implementation of the IRS's new repair and capitalization regs. Many of the issues causing the deepest concerns involved the filing requirements for Form 3115, Application for Change in Accounting Method.

Background

The AICPA's statement comes at a time when practitioners are sharply divided in their interpretation of the rules.

One school of thought holds that nearly every business with depreciable property must file a Form 3115 adopting any applicable method of accounting rules changed by the regs, even though the change is being initiated by the IRS (in the form of new regs), not the taxpayer. The alternative view is that no Form 3115 is required in situations in which the new rules lead to the same result as the old rules (e.g., the taxpayer was capitalizing under the old rules and will continue to capitalize under the new rules), because there really is no change in accounting method in such situations.

The IRS, which has not updated the instructions to Form 3115 in nearly three years, has remained silent about filing requirements under the new repair and capitalization regs.

AICPA Relief Proposal

The AICPA has stepped into the void by amplifying its earlier proposal to the IRS that the following relief should be offered to small businesses:

- Make Form 3115, as well as the section 481 adjustment, optional.

- Allow for the adoption of a "cut-off method" and apply the rules prospectively.

- Accept a statement in lieu of Form 3115 to acknowledge compliance with the regulations.

- Raise the de minimis safe harbor from $500 to $2,500.

The IRS has not responded publicly to the AICPA's proposal. Some well-respected practitioners have, however, indicated that (based on their conversations with IRS personnel) the issue is coming to a head within the IRS and additional guidance will be released.

The AICPA's Recommendations to Members

The AICPA's statement included a surprisingly frank assessment of the situation:

"We find ourselves in a challenging predicament. On the one hand, we are hopeful that the IRS will issue relief which would ease the burden for small businesses. On the other hand, there is no guarantee that relief will come in time (if at all). As we move further into tax season, tensions continue to mount as rumors spread regarding what the IRS may or may not provide in terms of guidance, relief, support or enforcement. We have heard that many practitioners are deferring the preparation of Form 3115 in anticipation of possible relief."

Based on this assessment, the AICPA indicated that it sees only two options for its members working on returns for which it's not clear whether a Form 3115 is required:

(1) Continue under current rules and adapt if/when the IRS issues relief (running the risk that work may need to be revised or may prove obsolete); or

(2) Temporarily suspend all related work in hopes of near-term IRS relief (running the risk that such relief may not be forthcoming).

Based on the context, it appears that when the AICPA refers to continuing "under the current rules", it is referring to a strict interpretation of the regs that would result in filing Forms 3115 for a great many business taxpayers.

In the statement's concluding paragraph, the AICPA makes clear that while it cannot formally advise its members to disregard existing law and regulations and simply not comply, it is ultimately up to the firms to make an informed decision on how to handle the Form 3115 quandary based on their unique circumstances, client mix, and resources. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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