IRS Issues Accounting Method Relief for Small Businesses

Companies with less than $10 million in total assets as of the beginning of the 2014 tax year or less than $10 million in average annual revenues for the last three years may benefit from a new revenue procedure issued by the IRS on February 13, 2015. Filing requirements have been simplified to allow small business taxpayers to change certain methods of accounting relating to the final tangible property regulations on a go-forward basis.

What Was Issued?

On February 13, 2015, in an effort to alleviate the administrative burden imposed upon small business owners by the final tangible property regulations, the IRS issued Rev. Proc. 2015-20 to help small business owners more easily comply with the final regulations. The new guidance allows taxpayers with either total assets of less than $10 million as of the first day of the taxable year or average annual gross receipts totaling $10 million or less for the prior three tax years to change a method of accounting under the final tangible property regulations on a prospective basis with a section 481(a) adjustment. This adjustment takes into account only amounts paid or incurred in the first taxable year beginning on or after January 1, 2014. Taxpayers who choose to employ such an approach will be permitted to change their method of accounting for certain tangible property and disposition costs without filing an IRS Form 3115. Any taxpayer choosing to take advantage of the method change relief in Rev. Proc. 2015-20 for tangible property capitalization changes must follow the same procedure for disposition-related method changes. The revenue procedure also requests comments as to whether the $500 de minimis safe harbor should be increased for taxpayers without an applicable financial statement. Further guidance is expected in coming weeks, including FAQs relating to potential method change requirements affecting all taxpayers.

What is the Effect?

This means small business owners who choose to apply the tangible property regulations prospectively for amounts paid or incurred in tax years beginning on or after January 1, 2014, have the option of changing their method of accounting without filing an IRS Form 3115 with the 2014 tax return. Any taxpayer filing under this procedure with their 2014 return should not be required to calculate a 481(a) adjustment relating to expenditures in previous tax years in order to change their method of accounting on a go-forward basis. A few points should be noted. First, there may still be instances where it is deemed advantageous for one of these “small taxpayers” to file a Form 3115 to retroactively deduct certain costs that had been capitalized in previous tax years. Second, taxpayers who choose to take advantage of the method change relief in Rev. Proc. 2015-20 and apply the regulations prospectively are not permitted to retroactively make a late partial disposition election. Finally, taxpayers filing under this procedure do not receive audit protection for tax years beginning prior to January 1, 2014. We will continue to monitor future guidance in this area as we move through filing season.

Understanding the unique needs of business owners, our professionals can help you plan for your tax responsibilities. Please contact your Elliott Davis Decosimo tax advisor with any questions.