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Form 3115 Change in Accounting Method:

Navigating New Repair Regulations

WEDNESDAY, MAY 6, 2015, 1:00-2:50 pm Eastern

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FOR LIVE EVENT ONLY

Form 3115 Change in Accounting Method

May 6, 2015

Ellen McElroy

Sutherland Asbill & Brennan

[email protected]

Karen Messner

KPMG

[email protected]



Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

New Procedural

Requirements for Filing

a Form 3115: Rev.

Procs. 2015-13 and

2015-14

6

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member fi rms affiliated with

KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.

FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.

Overview: What is a Change in Method of

Accounting?

Section 446(e) requires a taxpayer to obtain IRS

consent to a change of accounting method

Treas. Reg. §1.446-1(e)(2)(ii)(a) defines changes in

accounting method as including:

– a change in overall plan of accounting; or

– a change in treatment of any material item

Defines a “Material Item” as any item involving the

proper time for income inclusion or deduction

Thus, as companies consider how to implement the

tangible property regulations (the “repair regulations”),

have to consider whether various changes are

considered accounting method changes

7 7




New Accounting Method Change Procedural

Guidance

Revenue Procedures 2015-13 and 2015-14 were issued on

January 16, 2015

– Generally effective for Forms 3115 filed on or after 1/16/15

– Year of change ending on or after 5/31/14

– Subject to transition rules for filings

Rev. Proc. 2015-13 updates and revises general procedures

under Section 446(e) to obtain consent to change a method of

accounting

– Addresses advance (non-automatic) consent and automatic consent

for method changes

– Effectively supersedes Rev. Proc. 97-27 (non-automatic consent) and

Rev. Proc. 2011-14 (automatic consent)

Rev. Proc. 2015-14 contains the list of accounting method

changes eligible for the automatic consent procedures set forth

in Rev. Proc. 2015-13

8 8




Transition Relief

Automatic Procedures

– May file under Rev. Proc. 2011-14 for years ending on or after May

31, 2014 and on or before January 31, 2015 may file under Rev.

Proc. 2011-14

– File by due date of timely filed federal income tax return (including

extensions)

– Changes under tangible property or dispositions regulations (or

other changes where the scope limitations of Rev. Proc. 2011-14

are waived) may use this transition relief and file under Rev. Proc.

2011-14

9




What has changed?

Eligibility to file

Most significant changes involve taxpayers under IRS

examination

Taxpayers can now file anytime, even when under exam

However, taxpayers no longer receive taxpayer-friendly

terms and conditions for change (i.e., audit protection and 4-

year spread of any positive adjustment)

Unless Form 3115 is filed within a window period or meets

certain exceptions

10




What has changed?

Taxpayers Under Exam

Under Rev. Proc. 97-27 and Rev. Proc. 2011-14,

taxpayers under IRS exam were generally prohibited

from filing an accounting method change

Unless the accounting method change was filed:

– During the 90-day window

› 1st 90 days of tax year if taxpayer has been under exam for 12

consecutive months;

– During the 120-day window

› Following close of exam, even if a new one begins;

– With the District Director’s consent

• Consent is generally available unless change is likely to be

included as an exam adjustment

11 11




What has changed?

Taxpayers Under Exam

Rev. Proc. 2015-13 generally makes accounting

method changes available for taxpayers under IRS

exam

However, the revenue procedure also places

restrictions on these changes

– Taxpayers do not receive audit protection

– New shortened spread of Section 481(a) adjustment (reduced from

four years to two-year spread period) of a positive (unfavorable)

adjustment

– Unless the Form 3115 is filed in a window period or one of the other

audit protection exceptions apply (i.e., present method not before the

director or new member of a consolidated group in CAP).

12 12




What has changed?

Shortened period for unfavorable adjustment

General rule – 4-year spread for positive, 1-year for negative

– If taxpayer files method change while under IRS exam, the adjustment

period is two taxable years unless an exception applies

– Taxpayers may elect to take a positive adjustment of less than

$50,000 into account in the year of change (previously $25,000)

13




What has changed?

Exceptions permitting four year adjustment

If one of these exception applies, the adjustment period is

four taxable years even when a taxpayer is under exam:

• “Three-month window”: Applies to applications filed in the period beginning

on the 15th day of the 7th month of taxpayer’s tax year and ends on the 15th

day of the 10th month of the taxpayer’s tax year

› For a calendar year taxpayer, it is the period between July 15 through October 15

• “120 day window”: Applies to applications filed in the 120 day period

following end of an IRS exam, regardless of whether new cycle has begun

• Present method not before director: Applies to a change from a clearly

permissible method or from an impermissible method where that method

was adopted subsequent to the years under exam

• New member of a consolidated group: Applies to certain taxpayers in CAP

14




What has changed?

Filing method changes while under IRS exam

Unless an exception applies, there is no audit protection if

method change is filed while under IRS exam:

• “Three-month window”: Applies to applications filed in the period beginning

on the 15th day of the 7th month of taxpayer’s tax year and ends on the 15th

day of the 10th month of the taxpayer’s tax year

› For a calendar year taxpayer, it is the period between July 15 through October 15

• “120 day window”: Applies to applications filed in the 120 day period

following end of an IRS exam, regardless of whether new cycle has begun

• Present method not before director: Applies to a change from a clearly

permissible method or from an impermissible method where that method

was adopted subsequent to the years under exam

• New member of a consolidated group: Applies to certain taxpayers in CAP

• Change results in a taxpayer favorable (“negative”) section 481(a)

adjustment: Applies if adjustment is negative in year of change and would

have been in years under exam

15

Tangible Property (“Repair”)

Regulations

16




Final Tangibles Regulations

Scope of regulations—three “buckets”

– Acquisition costs

– Improvement/repair and maintenance costs

– Dispositions

Final regulations (acquisition and improvement costs)

published September 19, 2013

Final Regulations (dispositions) published August 18,

2014

Generally effective for first tax year beginning on or after

January 1, 2014, although taxpayers were permitted to

apply to tax years beginning on or after January 1, 2012

17




Final Tangible Regulations—Framework

Treas. Reg. § 1.162-3

– Treatment of materials and supplies

Treas. Reg. § 1.162-4

– Treatment of repairs and maintenance

Treas. Reg. § 1.263(a)-1

– General rules for capitalization

Treas. Reg. § 1.263(a)-2

– Treatment of amounts paid to acquire or produce tangible property

Treas. Reg. § 1.263(a)-3

– Unit of property

– Treatment of amounts paid to improve tangible property

18

Slide Intentionally Left Blank

Acquisition Costs

20




Acquisition of Tangible Property: Overview

Basic rule—capitalize costs to acquire or produce tangible

property

– Transaction costs also must be capitalized

• Requirement to capitalize “inherently facilitative costs”

• Special rules for acquisition of real property

• Exceptions for employee compensation and overhead

– De minimis safe harbor rule

– Materials and supplies

21




Selling and acquisition costs

Commissions and other transaction costs paid to facilitate

the sale of property are capitalized costs that reduce the

amount realized on the sale

– If taxpayer is a dealer in property, amounts paid to facilitate the sale

of property are deductible ordinary and necessary business

expenses

Amounts paid to acquire or produce a unit of real or

personal property are capitalized

– Includes the invoice price, transaction costs and costs for work

performed prior to the date the unit of property is placed in service

by the taxpayer

22




Transaction costs

Amounts paid to facilitate the acquisition of real or

personal property must be capitalized

– An amount is facilitative if it is paid in the process of investigating or

otherwise pursuing the acquisition

Inherently facilitative amounts must be capitalized:

– Transporting property

– Determining the value of property (e.g., appraisal)

– Negotiating terms or structure of acquisition (including tax advice)

– Application fees, bidding and similar costs

– Preparing and reviewing transaction documents (e.g., purchase

agreement)

– Examining and evaluating title

23




Transaction costs (cont’d)

– Obtaining regulatory approval or securing permits

– Sales and transfer taxes and title registration costs

– Finder fees/broker commissions, including contingency fees

– Architectural, geological, survey engineering, environmental or

inspection services pertaining to particular properties

– Services provided by a qualified intermediary or other facilitator

exchange under Section 1031

Special rule for real property – except for inherently

facilitative amounts, other facilitative costs are not required

to be capitalized if incurred in the process of deciding

whether to acquire real property and which real property to

acquire

24




De Minimis Safe Harbor Rule

Follow financial accounting capitalization threshold

– May be based on either specified dollar amount or economic useful

life of 12 months or less

Requirements for use:

– Taxpayer must have an Applicable Financial Statement (AFS)

– Taxpayer treats amounts paid as an expense on its AFS, in

accordance with its written accounting procedures (procedures

must be in place at the beginning of the year)

– Limited to $5,000 per invoice (or item listed on invoice)

• $5,000 limit does not include transaction or similar costs unless included

on same invoice

25




De Minimis Safe Harbor Rule (Cont’d)

– Elected (irrevocably) on an annual basis for all eligible items

acquired during year (including materials and supplies)

• Election statement required with timely original return

Extension to taxpayers without AFS

– Generally same as rule applicable to taxpayers with AFS, except

per invoice (or item) threshold reduced to $500

26




De Minimis Safe Harbor Rule (Cont’d)

Ineligible items

– Amounts included in inventory property

– Land

– Rotable, temporary, and standby emergency spare parts that

taxpayer elects to capitalize and depreciate or for which the optional

method is used

Amounts may still be subject to capitalization under

§ 263A

– §263A requires taxpayers to capitalize direct and indirect costs of

production or resale activities

27




Materials and Supplies

Defined

Components used to repair,

maintain, or improve a UOP

owned, leased or serviced by

the taxpayer

Fuel, lubricants, water, etc.

consumed within 12 months

UOP with economic life of 12

months or less

UOP with a cost of $200 or less

Rotable, temporary, or

emergency standby spare parts

Property identified in published

guidance as materials and

supplies

Incidental Supplies

No record of consumption kept

Deduct when acquired

May deduct when incurred

under safe harbor de minimis

rule

Non-incidental Supplies

Record of

consumption/inventory kept

Deduct when used or consumed

May deduct when incurred

under safe harbor de minimis

rule

28




Rotable, Temporary, and Standby Emergency

Spare Parts

Rotable Spare Parts: M&S acquired for installation on a UOP, removable from UOP, repaired, and re-used

Temporary Spare Parts: M&S used until a new or repaired part can be installed then removed and stored for later use

Standby Emergency Spare Parts: M&S acquired to prevent downtime in the event of a failure of a specific item

Option 2

Capitalize and depreciate

starting on acquisition

Option 1

Deduct full basis on final

disposition

Option 4

Deduct when incurred

under safe harbor de

minimis rule unless

optional method is used

or election to capitalize

and depreciate is made

Option 3

Optional method –

exchange type treatment

Deduct when placed in

service and capitalize

repair costs of broken

item

If elected, generally

applies to entire pool

REQUIRED if used for

books and records

29

Maintaining or Improving

Property

30




Unit of Property

Buildings Everything Else

Default Rule Plant Property Network Assets Single UOP

Functional

Interdependence

Discrete and major

function

Facts &

circumstances -

industry specific

31




Unit of Property—Buildings

Entire building

Determine UOP

Apply

Capitalization

Standards

Building

structure Building

systems

HVAC

Plumbing

system

Electrical

system

All escalators

All elevators

Fire protection

Security system

Gas distribution

Capitalize

Improvements

to UOP

Entire building

32




Unit of property for leasehold improvements

Lessee improvements to building

• Lease of entire building

› The building structure and building systems

• Lease of a portion of building

› Portion of building structure and building systems subject to lease

Improvements to a lessee improvement not tested as a

separate unit

33




Repair vs. Improvement Determination

Generally, facts and circumstances determination

– Apply capitalization standards

• Including safe harbor rules/election to capitalize, etc.

– If capitalization standards do not apply, deduct as repairs &

maintenance expenses under § 162

34




Capitalization Standards

Improvement standards—an amount paid must be capitalized if it results in a:

Betterment to the unit of property Adaptation of the unit of property to a

new or different use (compared to

placed in service date)

Restoration to the unit of property

Ameliorates material condition or

defect at acquisition or during

production

1.

Material addition or expansion, e.g.,

physical enlargement, addition of

major component

2.

Reasonably expected to materially

increase Quality, Capacity,

Productivity, Efficiency, Strength, or

Output

3.

Replacement and recognition of a

loss on disposed of component

Gain/loss on sale of a component

Basis adjustment as a result of a

casualty loss or event

Return to former operating

condition after no longer functioning

Rebuild the property to like new

condition after end of class life

Replacement of major component or

substantial structural part of UOP

1.

2.

3.

5.

4.

6.

35




Betterments—Additional Rules

Determination of whether betterment has occurred based

on qualitative factors

Whether an expenditure necessitated by an event

(whether damage or wear & tear) has occurred results in a

“betterment” is analyzed based on condition of property

immediately before and immediately after event (but

never looking back prior to taxpayer’s acquisition of

property)

36




Restorations—Additional Rules

Major component: a part or combination of parts that

performs a discrete and critical function in the operation of

the UOP

Substantial structural part: a part or combination of parts

that comprises a large part of the physical structure of the

UOP

“Plan of rehabilitation doctrine” repealed

– Replaced with § 263A standard where costs that directly benefit or

are incurred by reason of improvement must be capitalized

Casualty loss deduction generally allowed under final

regulations to extent restoration expenditures exceed

adjusted basis of damaged property

37




Routine maintenance safe harbor

Routine maintenance expected to be performed more than once during property’s ADS class life

• Exception for buildings: Testing period is 10 years instead of 40 year ADS life

Inapplicable to: • Betterments and adaptations

• Restoration standards 1-4

• Network property

May be performed at any time during assets life, and book treatment not relevant

Reasonable expectation • Taxpayer’s experience relevant

• Hindsight cannot be used to invalidate if taxpayer expectation was reasonable

38




Per Building Safe Harbor for Small Taxpayers

Permits current deduction of limited amount of

improvements if certain requirements are met

Requirements for application

– Taxpayer has $10 million or less of average annual gross receipts

for 3 preceding years

– Building has unadjusted basis of $1 million or less

– Total amount paid for repairs, maintenance, improvements, etc., on

building does not exceed

lesser of:

• $10,000

• 2% of building’s unadjusted basis

– Election statement filed with timely return for year

39




Book Capitalization Election

Taxpayer may elect to capitalize otherwise deductible

repairs if:

– Incurred in a trade or business and

– Capitalized in books and records

Applicable to all amounts capitalized in books and records

during a given year

Election made by attaching statement to timely filed

original return

Election to follow book does not extend to costs expensed

for book purposes

– These amounts must be analyzed to determine whether deducting

for tax purposes is appropriate

40




Casualty loss rule (Treas. Reg. §1.263(a)-3(k)(4))

The final repair regulations retain the rule that a restoration requiring capitalization includes the replacement of an asset or portion of an asset resulting from a casualty event.

However, a taxpayer would not be required to treat as a restoration the amount of its post-casualty replacement expenditures that exceed the adjusted basis of the property damaged in the casualty.

• Example: Taxpayer owns an office building that suffers storm damage and deducts a casualty loss under section 165 in the amount of $50,000 and properly reduces it basis in the building by $50,000. The taxpayer pays a contractor $75,000 to repair the damage to the building. The taxpayer must treat the initial $50,000 paid to the contractor as a restoration of the building and therefore must treat this amount as an improvement to the building and capitalize the cost. The remaining $25,000 that exceeds the basis limitation is not required to be treated as a restoration and must be treated in accordance with the provisions of the code and regulations that are otherwise applicable. (e.g., Treas. Reg. §1.162-4 (repairs and maintenance) or Treas. Reg. §1.263(a)-3 (costs to improve tangible property)).

Note: The proposed regulations would make the recognition of a casualty loss mandatory and not subject to the partial disposition election.

41




Removal costs (Treas. Reg. §1.263(a)-3(g)(2))

Removal costs generally are deductible if the taxpayer treats the removal as the

disposition or partial disposition of the asset or one of its components –

regardless whether the removal relates to a repair or a capital improvement

If the removal is not treated as a disposition (or partial disposition) for federal tax

purposes, the treatment of the removal costs depends on whether the removal

“directly benefits or is incurred by reason of” a repair or a capital improvement

• Example: Taxpayer installs stronger columns and girders to materially increase the load-carrying

capacity of a second floor storage area. The removal of the original columns and girders is

treated as a disposition for tax purposes. The removal costs are deductible.

• Example. Same facts, except the removal of the original columns and girders is not treated as a

disposition for tax purposes. Because costs to remove the original columns and girders directly

benefits and is incurred by reason of the improvement of the building structure, the removal costs

must be capitalized as a cost of the improvement.

• Example: Taxpayer replaces shingles with comparable shingles in order to repair a leaking roof.

The removal of the old shingles is not treated as a disposition for tax purposes. Even though the

removal of the shingles benefits and is incurred by reason of the installation of new shingles,

because the activity is not an improvement to the unit of property, the removal costs are not

required to be capitalized.

42


Limited-time Disposition

Method Changes

44




Disposition Method Changes

Revocation of general asset account election

Late partial disposition election (1.168(i)-8(d)(2)(i))

Only treated as method changes for tax years beginning before January 1, 2015

45

Tangible Property Method

Changes

46




Appendix section 10.11(3)

Materials and supplies:

Changes

Final regulations

(and corresponding

temporary

regulations)

Designated automatic

accounting method

change number

Change to deducting amounts paid or incurred to acquire or

produce non-incidental materials and supplies in the

taxable year in which they are first used in the taxpayer’s

operations or consumed in the taxpayer’s operations

1.162-3(a)(1) and

1.162-3(c)(1)

186

Change to deducting amounts to acquire or produce

incidental materials and supplies in the taxable year in

which paid or incurred

1.162-3(a)(2) and

1.162-3(c)(1)

187

Change to deducting amounts paid or incurred to acquire or

produce non-incidental rotable and temporary spare parts

in the taxable year which the taxpayer disposes of the parts

1.162-3(a)(3) and

1.162-3(c)(2)

188

Change to the optional method of accounting for rotable

and temporary spare parts

1.162-3(e) 189

47




Appendix section 10.11(3) (continued)

Repairs and maintenance and improvements to tangible property:

Changes

Final regulations

(and corresponding

temporary

regulations)


accounting method

change number

Change to deducting amounts paid or incurred for repair

and maintenance, including a change, if any, in identifying

the unit of property or, in the case of a building, identifying

the building structure or building systems for purposes of

making the change to deducting the amounts

*Includes Routine Maintenance Safe Harbor

1.162-4, 1.263(a)-3(e),

and 1.263(a)-3(e)(2)

1.263(a)-3(i)

184

Change to capitalizing amounts paid or incurred for

improvements to tangible property and, if depreciable, to

depreciating such property under section 167 or 168,

including a change, if any, of identifying the unit of property

or, in the case of a building, identifying the building

structure or building systems for purposes of making the

change to capitalizing the amounts

1.263(a)-3, 1.263(a)-

3(e), and 1.263(a)-

3(e)(2)

184

Change to the optional regulatory accounting method to

determine whether amounts paid or incurred to repair,

maintain, or improve tangible property are treated as

deductible expense or capital expenditures

1.263(a)-3(m) 185

48




Appendix section 10.11(3) (continued)

Transaction Costs:

Changes

Final regulations

(and corresponding

temporary

regulations)


accounting method

change number

Change by a dealer in property to deduct amounts paid or

incurred for commissions and other transaction costs that

facilitate the sale of property

1.263(a)-1(e)(2) 190

Change by a non-dealer in property to capitalizing amounts

paid or incurred for commissions and other costs that

facilitate the sale of property

1.263(a)-1(e) 191

49




Appendix section 10.11(3)

Acquisition and production costs:

Changes Final regulations

(and

corresponding

temporary

regulations)

Designated

automatic

accounting

method change

number

Change to capitalizing amounts paid or incurred to acquire or

produce property, and if depreciable, to depreciating such

property under section 167 or 168

1.263(a)-2 192

Change to deducting amounts paid or incurred in the process of

investigating or otherwise pursuing the acquisition of real property

1.263(a)-2(f)(2)(iii) 193

50




Elections Available Under Final Regulations

– May be made for tax years beginning (or, in some cases, amounts paid in tax years beginning) on

or after January 1, 2014 (or for tax years beginning on or after January 1, 2012 by following the

procedures provided in the regulations).

• Elections include:

› Election to capitalize and depreciate amounts paid or incurred for certain materials and

supplies (rotable spare part, temporary spare part, or standby emergency spare part) (Treas.

Reg. sec.1.162-3(d))

› Election to expense amounts paid or incurred under the de minimis safe harbor (Treas. Reg.

sec. 1.263(a)-1(f))

› Election to capitalize amounts paid or incurred for employee compensation or overhead as

amounts that facilitate the acquisition of real or property (Treas. Reg. sec. 1.263(a)-

2(f)(2)(iv)(B))

› Election to expense amounts paid or incurred for repairs, maintenance, improvements

performed on eligible building property under the safe harbor for small taxpayers (Treas. Reg.

sec. 1.263(a)—3(h))

› Election to capitalize amounts paid or incurred for repair and maintenance costs consistent

with the taxpayer’s books and records (Treas. Reg. sec. 1.263(a)-3(n))

51




Section 481(a) Adjustment

In general, changes under Appendix Section 10.11 are

made with a section 481(a) adjustment

Modified section 481(a) adjustment required for certain

changes:

• In general, only amounts paid or incurred in taxable years beginning on or

after January 1, 2014 are taken into account

52




Modified Section 481(a) Adjustment

The following changes require a modified section 481(a) adjustment:

• Material and supplies

› deducting non-incidental materials and supplies when used or consumed

› deducting incidental materials and supplies when paid or incurred

› deducting non-incidental rotable and temporary spare parts when disposed of (Treas. Reg.

section 1.162-3, except 1.162-3(e))

• Acquisition and production of tangible property

› deducting amounts paid or incurred in the process of investigating or otherwise pursuing the

acquisition of real property (Treas. Reg. section 1.263(a)-2(f)(2)(iii))

› capitalization of inherently facilitative amounts allocable to real or personal property (Treas.

Reg. section 1.263(a)—2(f)(3)(ii))

Change to the optional regulatory accounting method (Treas. Reg. section 1.263(a)-3(m))

53




Section 481(a) Adjustment (other considerations)

Use of statistical sampling is permitted by following the guidance provided in Rev. Proc. 2011-42

– Exception – change in method that requires a modified section 481(a) adjustment.

Effect of UNICAP

– Rules generally require that the section 481(a) adjustment show the effect of section 263A on items that are included in the method change

▫ Consider – if not in compliance with UNICAP for the items being

changed under the final regulations, there would be no collateral

effect of UNICAP in the section 481(a) adjustment

▫ Examination has discretion to review the section 481(a)

adjustment

54


Rev. Proc. 2015-20

56




Rev. Proc. 2015-20 - applicability

– Applies to separate and distinct trade(s) or businesses(es)

– Small business taxpayer

• Total assets of less than $10 million as of first day of tax year for which change in method of accounting is

effective; or

• average annual gross receipts of $10 million or less for the prior three taxable years

– Method changes that may be made:

• Tangible property under the final tangible property regulations

• method of identifying which assets in multiple asset accounts or which portions of assets have been disposed of

by the taxpayer from the FIFO method of accounting or the modified FIFO method of accounting to the specific

identification method

• Method of identifying which assets in multiple asset accounts or which portions of assets have been disposed of

by the taxpayer from the FIFO method of accounting to the modified FIFO method of accounting, or vice versa

• Method of identifying which mass assets in multiple asset accounts or which portions of mass assets have been

disposed of by the taxpayer from the FIFO method of accounting or the modified FIFO method of accounting to a

mortality dispersion table

• Method of identifying which mass assets in multiple asset accounts or which portions of mass assets have been

disposed of by the taxpayer from a mortality dispersion table to the specific identification method, the FIFO

method, or the modified FIFO method

• Disposition of a building or structural component

• Disposition of tangible depreciable assets (other than a building or its structural components)

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Rev. Proc. 2015-20 - terms

– No late partial disposition election

– Sec. 481(a) – only amounts paid or incurred in taxable years beginning on or after January 1, 2014

• Must also use for dispositions changes made under sections. 6.37(3)(a)(iv), (a)(v), (a)(vii), (a)(viii), 6.38, 6.39 of

Rev. Proc. 2015-14.

– No Form 3115 required for first taxable year that begins on or after January 1, 2014

– No audit protection

– Transition rule

• If previously filed the federal tax return for the first taxable year beginning on or after January 1, 2014, can

withdraw the filed Form 3115 by filing an amended return on or before the due date of the taxpayer’s timely filed

(including any extension ) original federal income tax return for the requested year of change

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Rev. Proc. 2011-14

59




Appendix section 10.11 of Rev. Proc. 2011-14

Added by Rev. Proc. 2014-16

Permits changes under Treas. Reg. sections 1.162-3, 1.162-

4, 1.263(a)-1 though -3 of the final regulations for taxable

years beginning on or after January 1, 2012

Also applies to changes in depreciation

– Example: A method change to capitalize an improvement can also

include a change to treat the item as depreciable

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Scope limitations waived

The scope limitations in section 4.02 of Rev. Proc. 2011-14

are waived for changes made in a taxable year beginning

before January 1, 2015: • A taxpayer may make the automatic method change regardless of

whether

› It is under examination,

› It engaged in a section 381(a) transaction in the year of change,

› It changed its method of accounting for the same item (or applied for consent to change its method for the item regardless of whether it implemented the change) during any of the five taxable years ending with the year of change, or

› The year of change is the taxpayer’s final year of its trade or business.

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Other considerations

Any changes specified under Appendix section 10.11 can be

made on a single Form 3115

• Changes involving the same change number must be on a single Form

3115

Additional information required in Form 3115

– Description of item(s) being changed and present and proposed

methods of accounting must include the following:

• Citation to paragraph of final regulations (or temporary) that provides for

the proposed method(s) to which the taxpayer is changing.

• Detailed description of the unit(s) of property, building structure(s), or

building system(s) under the present and proposed methods of accounting,

if applicable

• To the extent a change involves depreciation under sections 167 or 168

must complete Schedule E of Form 3115.

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Compliance with Section 263A (UNICAP)

Compliance with Section 263A is not a required condition of

an automatic change to a method provided under the final

tangible property regulations

– Example: Taxpayer changing its method for materials and supplies to

a method provided in Treas. Reg. section 1.162-3 with improper

UNICAP method for those costs is not prohibited from filing automatic

change

Any potential exposure related to Section 263A would

continue if concurrent change not made

Scope limitations (e.g., being under IRS exam) are waived if

a concurrent UNICAP change is made for a taxable year

beginning before January 1, 2015

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Special Rules for Small Taxpayers

A “qualifying taxpayer” is required to complete only certain

information on the Form 3115: • A qualifying taxpayer is one whose average annual gross receipts for

the three preceding taxable years is less than or equal to $10,000,000

› Gross receipts are a taxpayer’s receipts for the taxable year that are properly recognized under the taxpayer’s methods of accounting used for Federal income tax purposes for the taxable year

• Rev. Proc. 2014-16 specifies the questions on Form 3115 that must be answered by a qualifying taxpayer

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Filing Procedures

Dual filing requirement:

– File Form 3115 copy with IRS in Ogden, UT no later than the date the

federal income tax return is filed for the year of change (including

extensions)

– Attach Form 3115 to the federal income tax return for the year of

change

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Questions??

Ellen McElroy

202-383-0948

[email protected]

Karen Messner

202-533-3041

[email protected]

66



Documents

Form 3115 Change in Accounting Method: Navigating New ...media.straffordpub.com/products/form-3115-change...May 06, 2015 · This program is approved for 2 CPE credit hours. To earn