A massive new set of IRS regulations went into effect at the beginning of 2014. Eight years in the making and over 200 pages long, the new regulations govern how business owners are allowed to deduct repairs and improvements to their business property. They also include new rules that allow business owners to currently deduct in one year the cost of some types of business property, instead of having to depreciate it over many years.
The IRS repair regulations took effect for tax years starting on or after January 1, 2014. In other words, starting on that date you had to apply them to all repairs and improvements you make to existing long-term assets, as well as to all additional long-term assets you buy for your business. Initially, the IRS also required all businesses to apply the repair regulations retroactively—that is, to years before 2014. This involved reviewing depreciation, repair, and improvements records for 2013 and earlier years to see whether depreciation practices followed in prior years jibed with the new regulations. If not, businesses had to depreciate amounts previously deducted and recognize taxable income based on the difference in treatment. On other hand, they may have also been able to currently deduct some amounts previously depreciated and take an immediate deduction for the difference. All businesses were supposed to file IRS Form 3115, Application for Change in Accounting Method along with schedules supporting any adjustments no later than the due date for their 2014 tax return (plus extensions).
In response to widespread complaints about the expense and difficulties involved in filing IRS Form 3115 and applying the IRS repair regulations retroactively to years before 2014, the IRS issued new regulations that provided smaller businesses with optional relief from this requirement (Revenue Procedure 2015-20.) This optional relief was available for all businesses with (1) assets under $10 million (as of the first day of the tax year) or (2) less than $10 million in annual gross receipts for each distinct business they own. Under this criteria, the vast majority of businesses qualified to use Revenue Procedure 2015-20.
To choose this option, businesses simply had to file their 2014 returns as normal and begin applying the repair regulations as of January 1, 2014. They did not need to go back to years before 2014 and make any changes in how they classified expenses as repairs or improvements or make any changes in their depreciation deductions. And they did not have to file the complex Form 3115, Application for Change In Accounting Method. There was no requirement that businesses include any statement in their returns that they were adopting Revenue Procedure 2015-20. Thus, if you filed your 2014 return without Form 3115, you may have adopted this option without even being aware of it.
Large businesses with assets or receipts over $10 million who are not eligible for the relief provided by Revenue Procedure 2015 had to apply the repair regulations retroactively and file IRS Form 3115, Application for Change In Accounting Method with their 2014 tax returns. For calendar year taxpayers, these were due by October 15, 2015 for individuals and single-member LLCs, and September 15, 2015 for multi-member LLCs, partnerships, and corporations. If you were required to file this form with your 2014 tax return and failed to so, you should consult a tax professional.
For more details on this complex topic, visit the IRS Tangible Property Regulations - Frequently Asked Questions webpage.