Rev. Proc. 2015-20: Accounting method change for small business taxpayers

Accounting method change for small business taxpayers

The IRS today released an advance version of Rev. Proc. 2015-20 that allows a “small business taxpayer” to make certain tangible property and dispositions changes in methods of accounting with a section 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014.

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Rev. Proc. 2015-20 [PDF 54 KB] defines a “small business taxpayer” as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three tax years. These tests are applied to each separate and distinct trade or business of the taxpayer.

Overview

In addition, Rev. Proc. 2015-20 provides that for the first tax year beginning on or after January 1, 2014, small business taxpayers are permitted to make certain tangible property and dispositions changes without filing a Form 3115 if they choose to make the changes by calculating a section 481(a) adjustment that takes into account only amounts in tax years beginning on or after January 1, 2014. Taxpayers filing under this procedure do not receive audit protection for tax years beginning prior to January 1, 2014.

The accounting method changes that may be made under the provisions of Rev. Proc. 2015-20 are changes under the final tangible property regulations (section 10.11(3)(a) of Rev. Proc. 2015-14); certain permissible to permissible methods of accounting for depreciation of MACRS property in mass asset accounts (sections 6.37(3)(a)(iv), (v), (vii), and (viii) of Rev. Proc. 2015-14); disposition of a building or structural component (section 6.38 of Rev. Proc. 2015-14); and dispositions of tangible depreciable assets (section 6.39 of Rev. Proc. 2015-14).

A taxpayer that chooses to use the procedures of Rev. Proc. 2015-20 for tangible property method changes must also use this procedure for its dispositions changes, and vice versa.

Note that a taxpayer that uses the method change relief in Rev. Proc. 2015-20 is not permitted to make a late partial disposition election.

Reasons for this guidance

The IRS stated that Rev. Proc. 2015-20 is intended to ease the administrative burden faced by small business taxpayers, including sole proprietors, by allowing them to prospectively apply the final tangible property regulations beginning in 2014.

Accordingly, Rev. Proc. 2015-20 modifies certain procedures provided in Rev. Proc. 2015-14* to permit small business taxpayers to make changes in methods of accounting with a section 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014. This modification means that, effectively, small business taxpayers making these changes in method of accounting for the first tax year that begins on or after January 1, 2014, may elect to make the change on a cut-off basis.

The IRS noted that some 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, whereas other small business taxpayers may prefer the administrative convenience of being able to comply with the final tangible property regulations in their first tax year that begins on or after January 1, 2014, solely through the filing of a federal tax return.

Accordingly, for the first tax year that begins on or after January 1, 2014, small business taxpayers that choose to apply the tangible property regulations prospectively to amounts paid or incurred, and dispositions, in tax years beginning on or after January 1, 2014, have the option of making certain tangible property and dispositions changes in method of accounting on the federal tax return without including a separate Form 3115 or separate statement.

Effective date, transition rule

Rev. Proc. 2015-20 is effective for tax years beginning on or after January 1, 2014. It also includes a transition rule, providing that a taxpayer may withdraw its Form 3115 by filing an amended federal tax return using this revenue procedure if the taxpayer:

  • Meets the scope requirements of this revenue procedure
  • Wants to use this revenue procedure for its first tax year beginning on or after January 1, 2014
  • Previously filed its federal tax return for that tax year with a Form 3115 to change to a method of accounting specified in Rev. Proc. 2015-20

The amended federal tax return must be filed on or before the due date of the taxpayer’s federal tax return for its first tax year beginning on or after January 1, 2014, including extensions. The withdrawn Form 3115 will not be taken into account for purposes of applying section 5.05 of Rev. Proc. 2015-13.

Request for comments on safe harbor limit

Rev. Proc. 2015-20 includes a request for comments on whether it is appropriate to increase the de minimis safe harbor limit provided in Reg. section 1.263(a)-1 (f)(1)(ii)(D) for a taxpayer without an applicable financial statement to an amount greater than $500, and, if so, what amount would be used and the justification for considering that amount appropriate.

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