Simplification of a very complicated new rule. Is it a repair or an improvement.

From my ATX blog.

IRS Delivers Relief from Form 3115 Repair Regulation Filing (Rev. Proc. 2015-20),(Feb. 16, 2015)

The IRS has issued a revenue procedure that offers significant relief to small business taxpayers from the requirements of filing a Form 3115, Application for Change in Accounting Method, to comply with the final repair regulations and certain MARS disposition regulations.

This relief is available to a taxpayer with one or more separate and distinct trades or businesses and has either:
• (1) total assets of less than $10 million as of the first day of the tax year for which a change in method of accounting under the final tangible property regulations is effective; or
• (2) average annual gross receipts of $10 million or less for the prior three tax years (as determined under Reg. §1.263(a)-3(h)(3))

The criteria for relief are applied separately to each of the taxpayer’s trades or businesses. A taxpayer’s separate and distinct trade or business that does not meet one or both criteria does not qualify for relief.

COMMENT: A taxpayer is required to comply with the final tangible property regulations in its first tax year beginning on or after January 1, 2014. The relief applies to the 2014 tax year.
The relief allows qualifying taxpayers to make changes to comply with the repair regulations and certain MACRS disposition regulations on a cutoff basis that only takes into account amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014. If a taxpayer chooses to make the changes on a cutoff basis, they may be made without filing Form 3115 for the taxpayer’s first tax year beginning on or after January 1, 2014. In other words, a taxpayer does not need to file Form 3115 for the 2014 tax year to comply with the covered changes if the taxpayer applies the changes on a cutoff basis and, therefore, does not have a Code Sec. 481(a)adjustment.

COMMENT: A taxpayer that applies the changes on a cutoff basis does not receive audit protection for amounts subject to the change for tax years beginning prior to January 1, 2014.
This IRS procedure states that the relief applies to all of the accounting method changes relating to the repair regulations which are described in Sec. 10.11(3)(a) of Rev. Proc. 2015-14, I.R.B. 2015-5, 450. This section provides the accounting method changes for compliance with virtually all repair regulations issued by T.D. 9636 (viz., Reg. §1.263(a)-3 (capitalization of improvements), Reg. §1.263(a)-2 (acquisitions of property), Reg. §1.162-3 (materials and supplies), and Reg. §1.162-4 (repairs).


If a taxpayer chooses to apply the repair regulations (Sec. 10.11(3)(a)) on a cutoff basis, it must also apply the MACR tangible property accounting method changes described in Secs. 6.37(3)(a)(iv), (v), (vii) or (viii) and Secs. 6.38 and 6.39 of Rev. Proc. 2015-14 on a cutoff basis without taking into account dispositions that occurred in a tax year beginning before January 1, 2014, and no Form 3115 is required to make the changes described in those sections. Audit protection is not provided for dispositions occurring prior to January 1, 2014, if these changes are applied on a cutoff basis. Conversely, if a taxpayer applies any of these disposition changes on a cutoff basis, then it must apply the repair regulations on a cut off basis.

The specified sections in Sec. 6.37 relate to permissible to permissible changes in identifying assets or portions of assets disposed of from multiple asset accounts and mass asset accounts. Sec. 6.38 and Sec. 6.39 relate to recognition of gain and loss on dispositions of buildings and structural components (Sec. 6.38) or section 1245 property (Sec. 6.39) that are considered disposed of without making a partial disposition election. Certain other changes are also described in those sections.

Significantly, a late partial disposition election to claim retirement losses on previously retired components may not be made by filing the method change described in Sec. 6.33 of Rev. Proc. 2015-14 if any accounting method change described in Sec. 10.11(3)(a) or in Secs. 6.37, 6.38, and 6.39 is applied on a cutoff basis. Thus, a taxpayer choosing not to file a Form 3115 to comply with the repair regulations may not make a late partial disposition election.

COMMENT: The late partial disposition election allows a taxpayer to claim a retirement loss on the undepreciated basis of previously retired structural components, such of the roof of a building. These losses can be significant for even small taxpayers. Consequently, many taxpayers who otherwise qualify for the relief provided in the new revenue procedure may choose not to exercise it. Similarly, taxpayers who would compute sizeable net negative (favorable) Code Sec. 481(a) adjustments for implementing the repair regulations by finding significant capitalized expenditures that are deductible under the repair regulations may decline the relief.

A transition rule allows a qualifying taxpayer that filed a return for its first tax year beginning on or after January 1, 2014, with a Form 3115 to change to a method of accounting to comply with the repair regulations under Sec. 10.11(3)(a) or the MACRS disposition regulations under the specified subsections of Sec. 6.37 or Secs. 6.38 and 6.39 to file an amended return to withdraw the Form 3115.

The IRS also requests written comments by April 21, 2015, on the issue of whether the $500 per item deduction limit under the de minimis safe harbor of Reg. §1.263(a)-1(f) should be increased.