Additional Time to File Form 3115 – Change of Accounting Method

Early last year, the IRS issued a set of new comprehensive regulations that significantly impact how companies deduct repairs and improvements to business property. These changes to tangible property regulations outline significant changes to how companies with $10M or more in revenue or assets treat tangible property repair expenses. While there are a number of qualification criteria that must be met generally the updated regulations provide additional and more easily realized tax-saving opportunities. As an example, companies will soon be able to deduct qualifying costs in one year rather than the multiple-year process required under existing regulations. This means immediate tax savings can be realized by the property owner.

As part of the changes, qualifying companies are required to change their method of accounting for income tax purposes. In most cases, a taxpayer that wishes to change its method of accounting must apply and secure the prior consent of the IRS. For some accounting method changes, the IRS provides an automatic procedure for obtaining its consent to the change. However, in general, a taxpayer uses Form 3115 (Application for Change in Accounting Method) for an accounting method change While this seems straightforward the transition period originally provided by the IRS was not sufficient leaving many unable to make the changes need to leverage the benefits. As a result, the IRS has provided transitional relief. To help clients, prospects and others better understand the changes; JLK Rosenberger has provided a summary of key points below.

Repair Regulation Modifications:

  1. Providing certain taxpayers affected by the final tangible property regulations additional time to file Forms 3115. Previously, taxpayers filing form 3115 in tax years ending on or after May 31, 2014, and on or before Jan. 31, 2015, had until the due date of their timely filed federal income tax return (including extensions) for the requested year of the change to file a Form 3115 under the procedures of Rev. Proc. 2011-14. The newly revised procedures now allow a taxpayer to request an automatic change under Rev. Proc. 2011-14 for tax years ending on or after May 31, 2014, and beginning on or before Jan. 31, 2015. Thus, the new revenue procedure extends this transition procedure to all taxpayers in the first tax to which the tangible property (or “repair”) regulations apply.
  2. Clarification has been provided as to when the automatic change procedures do not apply – The previous ruling limited the use of the automatic consent procedures when a taxpayer engaged in a liquidation or reorganization under Sec. 381 during the year of the change. This rule was broader than the IRS originally intended, thus the new ruling was amended to exclude only changes which apply to those made for a trade or business that is not operated as a separate or distinct trade or business.
  3. Clarification of the term and meaning of “3-month window” – The IRS defines “three-month window” to mean the period beginning with the 15th day of the seventh month of the taxpayer’s tax year and ending with the 15th day of the 10th month of the taxpayer’s tax year. However, it was unclear how this was to be interpreted by taxpayers using a 52–53-week year. The new revenue procedure specifies that for those taxpayers, when determining the “three-month window,” the tax year is considered to begin on the first day of the calendar month nearest to the first day of the 52–53-week tax year.   

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While these new regulations may come as a relief for many taxpayers, do be advised that IRS Form 3115 is extraordinarily complex and usually requires the assistance of an experienced advisor to guide you through the process. As a result, most taxpayers should not file without the help of a knowledgeable tax advisor who can guide you through the process. If you have questions, then contact JLK Rosenberger today! For additional information please contact us at (818) 334-8623, or click here to email us. We look forward to speaking with you soon.