The New Rules and Consequences of RP 2015-20

The IRS released Revenue Procedure 2015-20 on Friday the 13th, February 13, 2015. Note that the final tangible property regulations (TPRs) rules have not changed. RP 2015-20 only addresses the issues associated with the implementation of those TPRs for taxpayers that qualify under the new RP. Below is a detailed summary of its new procedure rules and our thoughts and consequences on employing and not employing its method change procedures.

The New Rules of RP 2015-20:

  1. A taxpayer can employ RP 2015-20 if its separate and distinct trade(s) or business(es) is a qualifying taxpayer or has total assets of less than $10M as of the first day of tax year 2014 or has average gross receipts of $10,000,000 or less.
    1. This means that a taxpayer’s total businesses can be more than the limiting dollar criteria and still qualify for RP 2015-20 if its separate and distinct trade(s) or business(es) is a qualifying taxpayer or has total assets of less than $10M as of the first day of tax year 2014.
  2. A taxpayer that does not file any 3115s for 2014 defaults to the choice/provisions of RP 2015-20
  3. A taxpayer that uses RP 2015-20:
    1. Falls under the provisions of RP 2015-13 and cannot choose to employ the rules of RP 2011-14
    2. Cannot make concurrent automatic method changes without filing a Form 3115
    3. Does not receive audit protection for its tax years before tax year 2014 for the issues addressed by the tangible property regulations (TPRs)
    4. Chooses not to scrub its depreciation schedule as of January 1, 2014 ( or taxable year that begins afterwards if on a fiscal year basis) for prior year expenditures, on assets that were already placed in service, for repair and maintenance reclassification and will not obtain any resultant 481(a) adjustment(s), when measuring those expenditures against the restoration, adaption, betterment, or improvement standards of the final TPRs
    5. Must also choose not to employ any prior year asset dispositions under methods #205 or #206 (sections 6.38 and sections 6.39 of RP 2015-14). [IRS also refers to dispositions under section 6.37 but 6.37 is “permissible to permissible method of accounting for depreciation change.]
    6. Must also choose not to employ any prior year partial asset dispositions under method #196, section 6.33 of RP 2015-14.
    7. Can amend its tax return for 2014, if it already filed it with the submissions of Form 3115(s) to withdraw those filed 3115s before the due date of the return including any extension
    8. Will have to calculate a 481(a) adjustments only for transactions 1-1-14 and afterwards and not a 481(a) adjustment for any transactions as of 1-1-14.
      1. Note that IRC sections 446 and 481(a) go hand in hand. That is, if a taxpayer makes an accounting method change, it must adhere to the rules of both 446 and 481(a). A taxpayer making the choice of RP 2015-20 must also choose to employ the cut-off method of 481(a) which essentially means that the taxpayer will not have any dollar amount in its 481(a) adjustment. An adjustment under a cut-off method does not get any tax adjustments or differences between its old and new method(s) of accounting.

Comments or Thoughts on RP 2015-20:

  1. A taxpayer that qualifies to employ RP 2015-20
    1. Can instead choose to file the applicable Form 3115s.
      1. If a taxpayer does file the applicable Form 3115s it must file all of the applicable Form 3115s and cannot pick and choose which methods it wants to file and which methods it does not want to file.
    2. And does not file any Form 3115s, it has defaulted not to be able to file Form 3115s for the TPRs – EVER.
      1. Prior to the release of RP 2015-20, if a taxpayer missed the TPR 3115 filings in 2014 the eligibility rules of RP 2015-13 (prior scope limitations of RP 2011-14) would just come back into play. If those eligibility rules did not prevent the filing of the TPR methods, a taxpayer could then file the appropriate 3115s. Now a taxpayer is prohibited from doing so.
      2. If the taxpayer is not qualified to be able to employ RP 2015-20 and does not file the TPR 3115s by tax year 2014 it can still file in years after 2015, but is subject to the eligibility rules and the limitation of method #196 that it cannot be filed after 2014.
    3. Does not get audit protection for prior year TPR issues.
      1. This can be a very important issue for taxpayers.
        1. Example: ABC is a landlord and is being audited by the IRS for its expenditures for tax years 2012 and 2013. The IRS specifically wants to look at its tenant improvements that it capitalized and took advantage of section 179 and 168(k) (i.e. bonus depreciation). The IRS is asserting that those expenditures related to the building structures and systems and not tenant improvements. If the IRS is successful in its argument, those prior year expenditures would be required to be classified as 39 year property and not 15 year property. If so, the IRS would be able to assert a very large IRS adjustment to increase income as ABC expensed those assets fully. If instead ABC files the applicable and appropriate Form 3115s and supporting documents to argue that those prior year capitalized tenant improvements would instead be able to be written off under the TPRs as not arising to the level of a RABI, ABC could avoid that very large IRS audit adjustment.
    4. Should still file the applicable and appropriate Form 3115 and supporting documents, nevertheless, if it:
      1. Has either positive or negative 481(a) adjustments such that it can benefit economically from those filings.
      2. Needs audit protection.
    5. Still seems to be able to employ the methods of:
      1. The expensing of units of property of $200 and under (by filing method #186 and/or #187)
      2. The ability to employ the routine maintenance safe harbor (RMSH of 1.263(a)-3(i))
      3. The ability to employ the expensing of removal costs (1.263(a)-3(g))
    6. But will miss out on:
      1. The ability to define its unit of property as it so desires (1.263(a)-3(e) and/or 3(f) for leased property)
      2. The ability to correct UNICAP  issues concurrently by filing with the TPR automatic methods #184 to #193. 
    7. May sue the CPA preparer if the preparer does not file the TPR method changes where the method changes could have provided current economic benefit to the taxpayer or the taxpayer needed the audit protection provided by the Form 3115 filings.
      1. I recommend that all preparers who do not file the appropriate 3115s for RP 2015-20 eligible taxpayers obtain an indemnification from its clients. That document should cover the facts and consequences of not filing and the client’s clear choice that it chose not to file nonetheless.

Bottom line is that a taxpayer should still comply with the TPRs and file the necessary forms unless it has insignificant assets and TPR issues.

Copyright© 2015, Eric Wallace, LLC