IRS Fails to Provide New Accounting Method "Change Numbers" in Form 3115 Instructions.

(Parker Tax Publishing February 10, 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.

Badly outdated instructions for Form 3115 lack dozens of automatic accounting method "change numbers" required for changes relating to new repair and capitalization regs, which are expected to drive an unprecedented wave of 3115 filings.

Background

In 2013, the IRS issued final tangible property regulations which provided rules for (1) amounts paid or incurred for materials and supplies; (2) amounts paid or incurred for repairs and maintenance; (3) capital expenditures; (4) amounts paid or incurred for the acquisition and production of tangible property; and (5) amounts paid or incurred for the improvement of tangible property. The IRS followed in 2014 with final regulations for determining the gain or loss on dispositions of tangible property, identifying the asset disposed of, and accounting for partial dispositions of MACRS property. For most taxpayers, the new rules apply to tax years beginning on or after January 1, 2014.

In many situations, complying with the regulations will involve accounting method changes that will require filing Form 3115, Application for Change in Accounting Method. Officially designated accounting method "change numbers" are required to complete the form. In the past, these numbers have been available for lookup in a comprehensive list appearing in the form's instructions.

Practitioners trying to locate change numbers relating to the new repair and capitalization regs, however, have experienced an unpleasant surprise; because the instructions have not been updated since 2012, none of the change numbers relating to the new rules are on the list. In fact, the only IRS sources for the new change numbers are the unwieldy revenue procedures they derive from, some of which run to more than 300 pages.

Key Change Numbers Relating to New Capitalization and Repair Regulations

To help bridge the gap until the IRS updates the Form 3115 instructions, Parker has put together a list of the 39 automatic accounting method change numbers relating to the new repair and capitalization regs.

Practice Aid: For the complete list of the new accounting method change numbers, including cites to the underlying IRS revenue procedures and regulations, see ¶241,592.

The following are the more important change numbers for use in preparing 2014 Forms 3115:

184. Deducting amounts for repair and maintenance or capitalizing amounts for improvements to tangible property: Change number "184" applies to changing to deducting amounts paid or incurred for repair and maintenance or changing to capitalizing amounts paid or incurred for improvements to tangible property and, if depreciable, to depreciating such property under Code Secs. 167 or 168. This includes a change, if any, in the method of identifying the unit of property, or in the case of a building, identifying the building structure or building systems for the purpose of making this change. See Reg. Secs. 1.162-4, 1.263(a)-3; Section 10.11 in Rev. Proc. 2015-14.

185. Change to the regulatory accounting method: Change number "185" applies to changing to the regulatory accounting method to determine whether amounts paid to repair, maintain, or improve tangible property are to be treated as deductible expenses or capital expenditures. See Reg. Sec. 1.263(a)-3(m); Section 10.11 in Rev. Proc. 2015-14.

186. Change to deducting non-incidental materials and supplies when used or consumed: Change number "186" applies to changing to deducting non-incidental materials and supplies when used or consumed. See Reg. Secs. 1.162-3(a)(1), (c)(1); Section 10.11 in Rev. Proc. 2015-14.

187. Change to deducting incidental materials and supplies when paid or incurred: Change number "187" applies to changing to deducting incidental materials and supplies when paid or incurred. See Reg. Secs. 1.162-3(a)(2), (c)(1); Section 10.11 in Rev. Proc. 2015-14.

190. Change by a dealer in property to deduct commissions: Change number "190" applies to a change by a dealer in property to deduct commissions and other amounts paid to facilitate the sale of property. See Reg. Sec. 1.263(a)-1(e)(2); Section 10.11 in Rev. Proc. 2015-14.

191. Change by a non-dealer in property to capitalizing commission: Change number "191" applies to a change by a non-dealer in property to capitalizing commissions and other costs that facilitate the sale of property. See Reg. Sec. 1.263(a)-1(e)(1); Section 10.11 in Rev. Proc. 2015-14.

192. Change to capitalizing acquisition or production costs: Change number "192" applies to changing to capitalizing acquisition or production costs and, if depreciable, to depreciating such property under Code Secs. 167 or 168. See Reg. Sec. 1.263(a)-2; Section 10.11 in Rev. Proc. 2015-14.

193. Change to deducting costs for investigating or pursuing acquisition of real property: Change number "193" applies to changing to deducting certain costs for investigating or pursuing the acquisition of real property. An amount paid by the taxpayer in investigating or otherwise pursuing the acquisition of real property does not facilitate the acquisition if it relates to activities performed in determining whether to acquire real property and which real property to acquire. See Reg. Sec. 1.263(a)-2(f)(2)(iii); Section 10.11 in Rev. Proc. 2015-14.

194. Change to a reasonable allocation method for self-constructed assets: Change number "194" applies to a producer or a reseller-producer that wants to change to a reasonable allocation method within the meaning of Reg. Sec. 1.263A-1(f)(4), other than the methods specifically described in Reg. Secs. 1.263A-1(f)(2) or (3), for self-constructed assets produced during the taxable year, including any necessary changes in the identification of costs subject to Code Sec. 263A that will be accounted for using the proposed method. This also includes a change from not capitalizing a cost subject to Code Sec. 263A to capitalizing that cost for a producer or reseller-producer under a reasonable allocation method within the meaning of Reg. Sec. 1.263A-1(f)(4) that the producer or reseller-producer is already using for self-constructed assets, other than the methods specifically described in Reg. Sec. 1.263A-1(f)(2) or (3). See Section 11.09 in Rev. Proc. 2015-14.

196. Late partial disposition election: Change number "196" applies to a taxpayer that wants to make a late partial disposition election under Reg. Sec. 1.168(i)-8(d)(2)(i) or Prop. Reg. Sec. 1.168(i)-8(d)(2)(i) for the disposition of a portion of an asset by the taxpayer. This change also may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. See Reg. Sec. 1.168(i)-8; Section 6.33 in Rev. Proc. 2015-14.

199. Depreciation of leasehold improvements: Change number "199" applies to a taxpayer that wants to change its method of accounting to comply with Reg. Sec. 1.167(a)-4 for leasehold improvements in which the taxpayer has a depreciable interest at the beginning of the year of change. See Reg. Sec. 1.167(a)-4; Section 6.36 in Rev. Proc. 2015-14.

205. Disposition of a building or structural component: Change number "205" applies to a taxpayer that wants to make a change in method of accounting that is specified in Section 6.38(3) of Rev. Proc. 2015-14 for disposing of a building or a structural component or disposing of a portion of a building (including its structural components) to which the partial disposition rule in Reg. Sec. 1.168(i)-8(d)(1) applies. This change also affects the determination of gain or loss and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property. See Reg. Sec. 1.168(i)-8; Section 6.38 in Rev. Proc. 2015-14.

206. Dispositions of tangible depreciable assets other than a building or its structural components: Change number "206" applies to a taxpayer that wants to make a change in method of accounting specified in Section 6.39(3) of Rev. Proc. 2015-14 for disposing of Code Sec. 1245 property or a depreciable land improvement or disposing of a portion of Code Sec. 1245 property or a depreciable land improvement to which the partial disposition rule in Reg. Sec. 1.168(i)-8(d)(1) applies. This change also affects the determination of gain or loss and may affect whether the taxpayer must capitalize amounts paid to restore a unit of property under Reg. Sec. 1.263(a)-3T(i) or Reg. Sec. 1.263(a)-3(k), as applicable. See Reg. Sec. 1.168(i)-8; Section 6.39 in Rev. Proc. 2015-14.

215. Depletion: Change number "215" applies to a taxpayer that wants to change its method of accounting for depletion to treat these amounts as an indirect cost that is only properly allocable to property that has been sold (that is, for purposes of determining gain or loss on the sale of the property) under Reg. Sec. 1.263A-1(e)(3)(ii)(J). See Section 11.14 in Rev. Proc. 2015-14.

For a discussion of automatic changes in accounting method, see ¶ 241,590.40. For a complete list of change numbers relating to the new repair and capitalization regulations, see ¶241,592. (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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