The Affordable Care Act has grabbed most of the headlines for the upcoming tax season, but there are other requirements that will add to the difficulty of the 2014 filing season. One such requirement that will have an impact on almost all business owners, especially those in the real estate field, is the Repair Regulation that was issued by the IRS a few years ago.
The Repair Regulation changes the rules regarding what can be expensed as a repair versus what has to be capitalized and depreciated. Many businesses will have to change the way in which certain assets are reported in order to conform to the new standards. Some of these changes, such as immediate expensing of items, will provide a tax benefit, whereas others, such as recategorized items, will increase tax liability. When such elections and accounting changes are made (such as changing one piece of property from depreciable to non-depreciable), you must file Form 3115 – Application for Change in Accounting Method. This eight-page form requests a change in accounting policy, which must be approved by the IRS. It has been around for a while, but Form 3115 will be filed more than ever this year thanks to the new regulation.
Typically, if you are affected by the regulation, you will be required to file multiple Form 3115s for 2014. In some cases, each form will require supplemental statements. Each business that you own, even if it is a single member LLC, needs a separate Form 3115 in order to be in compliance with the new regulation.
In addition to filing Form 3115, you (or your tax preparer) will need to recalculate each depreciation schedule that is affected. You will also need to make annual elections related to depreciation and write-offs. One such election, the safe harbor rule, allows you to write-off any materials and supplies under $500. In order to receive this election, you must specifically state you are claiming the safe harbor rule with the return.
It is important to remember that Form 3115 should be filed before you file your tax return and should be submitted with your final return as well. The IRS has waived the usual fee associated with Form 3115 applications, so this is the best year to finalize the change before the fee is assessed again in 2015.
This is a very complicated issue and, coupled with the Affordable Care Act, can result in a headache while filing your 2014 returns. I wrote this brief summary to raise awareness of the issue. If you think this situation will impact you, I recommend reaching out to your tax professional or doing some additional research to make sure you will be in compliance with the changes.