Compliance with Repair Regs & Form 3115

A Form 3115 is required to tell the IRS that a change is being made to conform with the new repair regulations on tangible property (some of which are for items as simple as the method of expensing supplies and materials).

 

Deduct or Depreciate – IRS Repair Regulations

Therefore all businesses with tangible property are required to file the Form 3115 to request the change in accounting method, even though the change is to conform with the new regs. If there is no filing to request the change, the change is not technically permitted to occur. Additionally, there are circular 230 penalties of up to $10,000 per return for filing a return that is an “intentional disregard of rules or regulations by the practitioner”.

 

What are the IRS Repair Regulations?

The reapir regs state that “a taxpayer seeking to change to a method of accounting permitted in the final regulations must secure the consent of the Commissioner” “and follow the administrative procedures issued” “for obtaining the Commissioner’s consent to change its accounting method.” Basically there is no way to conform with the new regulations without filing a Form 3115.

 

Filing Form 3115 for Repair Regs

Some firms have taken the new regs to mean that they need to do hundreds of 3115s to “accept” these new regs, but since it’s an annual election for the safe harbor provisions the 3115 isn’t required.

Filing a 3115 is only necessary if the company is actually changing depreciation as a result of the new regs (either for disposing of components they could have, or capitalizing items they should have).

What this means for us is that as part of preparing 2014 returns we’ll be looking to see if there were any assets that could have been disposed (roof replacements, etc.).

 

Changes in New Repair Regulations

The new regs go so far as to require a 3115 so you can expense any repairs. The consideration of what constitutes a “repair” is simply changing. This requires an evaluation of the need to file 3115s, but not a mandatory filing for all clients to adopt the new regs. If the taxpayer has effectively always been in compliance with the new regulations, there’s no “change” that needs to be reported under the new regs. “Most, if not all, business taxpayers are affected by the new regulations. Consequently, business taxpayers will need to evaluate their current methods of accounting for tangible property to determine what changes are necessary to comply with the new regulations. Although the final regulations are generally effective for taxable years beginning on or after 1/1/14, if a taxpayer determines that repair deductions previously claimed are now, under the final regulations, not appropriate, a change in accounting method to conform to the final regulations is required.”

 

Repair Reg Laws

The new repair regs are the law now and following them is not optional. 2. The reapir regs specifically state that this is a change in accounting method. If you proceed to follow the new regs without filing a change in accounting method, the deductions can be denied.