IRS Issues TPR FAQs – March 5, 2015

On March 5, 2015, the IRS issued over 10 pages of what they refer to as “frequently asked questions and answers.”  In reading this IRS issuance on their website, I have a few new IRS positions or changes on the TPR method changes. I have marked those below as “New” in bold. I caution you to read carefully those that I have identified as “errors”, “observations”, or other “comments” in the IRS FAQ writing. Those consist of the following:

Please click here to view the IRS FAQs on the Tangible Property Final Regulations released March 5, 2015.

  1. Error: Top of page 4, the IRS identifies material and supplies including “$200 property – Costs of tangible property that has an acquisition cost or production cost of $200 or less”. The error is that $200 or less property only applies to units of property of $200 and less, not all tangible property of $200 or less.
  2. Error: Bottom of page 4, the IRS makes the following statement: “Because the final regulations governing the treatment of materials and supplies are based primarily on prior law, if you were previously in compliance with the rules you generally will still be in compliance and generally no action will be required to continue to apply these rules on a prospective basis. Also, the final regulations governing the treatment of material and supplies apply to amounts paid or incurred in taxable years beginning on or after Jan. 1, 2014. Therefore, for your first taxable year beginning Jan.1, 2014, most of you will not have a change in accounting method for your materials and supplies.” It seems that this statement should have stated instead “..most of you will not have a change in accounting method for your material and supplies.”
  3. Observation: It seems very clear now that the IRS has admitted that those taxpayers filing under RP 2015-20 (i.e. not filing any 3115s for tax year 2014 as they meet the eligibility requirements of the $10M and under rules) will be subject to the same IRS audit application of the TPRs for tax years prior to 2014. As such, not obtaining audit protection is a very big issues for taxpayers that have significant TPR issues. The following is presented in support of this statement: “The final regulations synthesize existing case law and prior administrative rules into a framework to help you determine whether a cost is deductible as a repair and maintenance expense or must be capitalized because it’s an improvement. If the amounts are not paid or incurred for an improvement to tangible property as determined under the final regulations, then the amounts generally are deductible as repairs and maintenance. Of course, whether a cost is for repair or an improvement will always require reviewing facts and circumstances, as required under prior rules.”
  4. Error: Top of page 5 the IRS refers to 263(a) when they clearly meant to refer to 263A: “The final regulations do not eliminate the requirements of section 263(a), which generally provides that you must capitalize the direct and allocable indirect costs of producing real or tangible personal property and acquiring property for resale.”
    1. The IRS also makes this same error in page 8 in referring to 263(a) when it should have referred to 263A.
  5. Error: Top of page 5, the IRS refers to the Routine Maintenance Safe Harbor (RMSH) as an election. RMSH is not an election, it is a method change under 1.263(a)-3(i). “In addition, the final regulations provide several simplifying safe harbors and elections (simplifying alternatives) to ease your compliance with these rules. See Safe Harbor Election for Small TaxpayersSafe Harbor for Routine Maintenance, and Election to Capitalize Repair and Maintenance Costs.”
    1. The IRS also states at the bottom of page 7 that because the RMSH was based on prior law, if a taxpayer was in compliance with the rules it would not have to file a method change. As the IRS created the RMSH opportunity for buildings (i.e. “more than once during the 10-year period beginning when placed in service”) in the issuance of the final TPRs it does not explain how a taxpayer could possibly have been in compliance with this part of the RMSH..
  6. Observation: Middle of page 5, the IRS confirms that lessors employ the whole building as the unit of property in considering the measurement of the employment of the RABI rules for the capitalization of tenant improvements. This should continue to provide landlord taxpayers with increasing confidence of the large negative 481(a)s for tenant improvements that they are experiencing in their depreciation scrubbings.  “Lessors of an entire building apply the improvement rules to the entire building structure and each of the key building systems.”
  7. New: Total assets of $10 million is defined in these FAQs as following:
    1. A taxpayer’s total assets are measured at the separate trade or business and not at the taxpayer level: “You apply this simplified procedure to each of your separate and distinct trades or businesses. Generally, a separate and distinct trade or business refers to each trade or business for which you keep a complete and separate set of books and records.You may choose to apply this procedure to each separate and distinct trade or business that meets one or both of the following criteria: Total assets of less than $10 million; or Average annual gross receipts of $10 million or less for the prior three taxable years.”
    2. The total assets are measured by the books and records and not by the tax accounting methods:§  “Total assets are determined by the accounting method you regularly use in keeping the books and records of your trade or business at the end of the tax year.”
  8. New: A taxpayer may apply the RP 2015-20 procedures to some of its trades and businesses and not to others:
    1. “If you have more than one separate and distinct trade or business, you can only choose the simplified procedure for the trades or businesses that meet at least one of the criteria specified above. You may not choose the simplified procedure for any trade or business that does not meet at least one of the criteria above. Therefore, you may be in a situation where you can apply the simplified procedure to some of your trade or businesses but not to others.”
    2. As a result, it seems logical that a taxpayer should state in its 3115 filings that the methods filed are meant to be applied to all of the taxpayer’s trades and businesses or alternatively that the taxpayer does not have any trades or businesses that are not encompassed as part of the 3115 method changes that are filed.
  9. Observation: That the taxpayer if employing RP 2015-20:
    1. Does not receive audit protection:

      §  “If you choose this procedure for a qualifying trade or business, you don’t receive audit protection for that trade or business for amounts paid or incurred in taxable years beginning before Jan. 1, 2014, and subject to the simplified method change procedures.

    2. That the taxpayer cannot pick and choose its methods it wants to and does not want to apply:

      §  “you must utilize this method for the trade or business for all changes specified under the procedure. Picking only some of the final regulation methods, but not all the changes specified under the procedure, is not permitted.”

    3. New: Can file a 3115 in tax year 2015 or after, and obtain audit protection although it did not file the TPR 3115s for tax year 2014. It just will not  be able to obtain the negative 481(a)s that could have been obtained in a TPR 3115 filing for tax year 2014:

      §  “for your first taxable year beginning in 2014 and decide to change these accounting methods for your trade or business in a later taxable year by filing a Form 3115 and calculating a section 481(a) adjustment in the later year, then the section 481(a) adjustment is calculated by taking into account only amounts paid or incurred, and dispositions, in taxable years beginning in 2014.”

  10. New: Statement on your 2014 filing if the taxpayer is or is not employing the procedures of RP 2015-20.
    1. RP 2015-20 makes the statement that the taxpayer should not file a statement with its return: “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.” That “impression” that no statement should be made with the return is modified by the following IRS statements in these FAQs:
      1. “If you choose the simplified procedure you should consider including, but are not required to include, a statement on your 2014 tax return indicating that the qualifying trade or business is utilizing the simplified procedure of Rev. Proc. 2015-20.”
      2. “If you choose not to utilize the simplified procedure and do not file Form 3115 to change to the final regulations with your 2014 tax return, you should consider including, but you are not required to include, a statement on your 2014 tax return indicating that your qualifying trade or business is not applying the simplified procedure of Rev. Proc. 2015-20.”

[New: Practice Note: a taxpayer that does not qualify under RP 2015-20 must file the appropriate 3115s and cannot make a statement that it is not. On the other hand a taxpayer that does qualify under RP 2015-20 should either file the appropriate 3115s or not file and default to the “deemed” 3115 filings of RP 2015-20. The IRS has added a third one now: a taxpayer who does not file the 3115s for 2014 and who also does not employ the “default” 3115 filings of RP 2015-20. A taxpayer in this position seems to have retained the right to file the TPR 3115s for tax years 2015 or after, as long as the eligibility rules of RP 2015-13 do not restrict its opportunity to file the TPR 3115s then. Recall that if the taxpayer employs this new avenue, it will be not be able to file method #196.]