I am not sure if I have seen more angst from tax preparers over the last year (other than Obama Care) than on the new Repairs Regulations that came out over a year ago. Many preparers assumed that wholesale Form 3115s were needed to accompany all of taxpayers tax returns for the 2014 tax filing (even if the IRS could not process many of these due to budget cuts, much less over 5-10 million of these Forms).
Last week, the IRS actually provided some very good practical Q&A guidance on these Regulations that should provide great comfort to many of our tax preparers and farmers. I wish that this guidance had been provided several months ago, but it is better late than never.
Some of the highlights:
- Farmers can make a de minimis election to expense anything costing less than $500 ($5,000 if they have an audited financial statement), but the guidance clearly states that you can deduct greater than this amount if your business warrants a higher amount. The guidance suggests that you make the election anyway to lock in the less than $500, but that election still allows you to deduct higher amounts.
- If you do not have an audited financial statement, you are not required to have any written accounting procedures regarding this de minimis amount.
- An annual election is not a change in accounting method (therefore NO Form 3115 is required). You simply make the election on your tax return each year.
- Materials and Supplies - There seems to be great amount of confusion on dealing with materials and supplies. Many commentators suggested adapting these new Regulations meant a change in accounting method requiring a Form 3115. The guidance indicates the Regulations merely incorporate pre-existing definitions and treatments. No Form 3115 is needed for almost all taxpayers. As long as you were in previous compliance, no changes or new forms are needed.
- Also, the new Regulations merely "synthesize existing case-law and prior administrative rules into a framework to help you determine whether a cost is a deductible as a repair and maintenance expense or must be capitalized because it is an improvement". Therefore, in almost all cases, no Form 3115 was actually required.
As stated previously, if this guidance had been issued at this same time last year, the tax accounting community would have saved hundreds of thousand of hours of unneeded angst time and we could have been certainly more productive in helping our clients on other matters.