Oh What a Relief It Is For Form 3115!

Posted by Rick Kolstad on

At the suggestion of the AICPA and to ease the administrative burden faced by small business taxpayers in applying the final tangible property regulations beginning in 2014, the IRS, in Rev Proc 2015-20 has provided relief for small businesses in complying with the tangible property regulations that allows the new regulations to be applied prospectively rather than retroactively.

  • Small Business Definition – For purposes of the relief, a small business taxpayer is defined as a taxpayer with one or more separate and distinct trade(s) or business(es) within the meaning of Reg Sec 1.446-1(d)(1), that has:
  • Under $10 million of total assets as of the first day of the tax year, OR

  • Average annual gross receipts of $10 million or less for the three prior tax years (Reg. §1.263(a)-3(h)(3)). 

Thus, a taxpayer with more than one business applies the limitations separately to each business.

  • What the Relief Provides - Small businesses need not apply the regulation retroactively and are not required to file a Form 3115 to report an accounting method change.  Instead they are permitted to make changes in methods of accounting with a Code Sec. 481 adjustment that takes into account only amounts paid or incurred, and dispositions, in tax years beginning on or after Jan. 1, 2014.

  • Form 3115 - Small business taxpayers may choose to file a Form 3115 in order to retain a clear record of a change in method of accounting or to make permissible concurrent automatic changes on the same form.  However, they have the option of making certain tangible property changes in method of accounting on the federal tax return without including a separate Form 3115 or separate statement.
  • Single 3115 - ordinarily a taxpayer must submit a separate Form 3115 for each automatic change.  However, concurrent automatic changes are permitted on a single form if they are limited to those specifically addressed in Rev Proc 2015-20. 

  • Partial Dispositions - Small business taxpayers that choose to make a tangible property disposition change that only takes into account dispositions in 2014 and succeeding tax years are not permitted to make a late partial disposition election (section 6.33 of Rev Proc 2015-14) for tax years beginning prior to Jan. 1, 2014.
(1) Reg Sec 1.446-1(d) - Where a taxpayer has two or more separate and distinct trades or businesses, a different method of accounting may be used for each trade or business, provided the method used for each trade or business clearly reflects the income of that particular trade or business. For example, a taxpayer may account for the operations of a personal service business on the cash receipts and disbursements method and of a manufacturing business on an accrual method, provided such businesses are separate and distinct and the methods used for each clearly reflect income. The method first used in accounting for business income and deductions in connection with each trade or business, as evidenced in the taxpayer's income tax return in which such income or deductions are first reported, must be consistently followed thereafter.  No trade or business will be considered separate and distinct for purposes of this paragraph unless a complete and separable set of books and records is kept for such trade or business.