If you’ve been following my emails and blog posts, you’ve already read about Form 3115. It’s without a doubt the most misunderstood and misaligned form of the year. The IRS has instructed auditors to not do anything with business returns filed for 2014 until all extension dates have passed. Then, they will target business returns that did not have Form 3115s attached
Why prepare this form you’ve probably never heard of before? The IRS passed 100 pages of final regulations named Tangible Property Regulations. Ostensibly, it was just for real estate investors who had property. However, there was a part added in that caught most business owners, and a few CPAs, by surprise. It is assumed that EVERY SINGLE supply, material or maintenance cost will be capitalized. Yep, if you buy a case of paper, you have to show it as an asset until you use the paper, ream by ream. You have to inventory or capitalize everything. There are no supply expenses. There are no material expenses. There are no maintenance or repair costs.
That is, unless you make an election under the safe harbor regulations and/or elect that $500 of repairs can be expensed and not have to be capitalized.
That election is made on the tax return or as part of Form 3115. If you’ve got real estate you have to file a few other Form 3115s. But if you’ve got a business, you have a choice on which to do: annual elections for file Form 3115.
And that leads to a question we received here at USTaxAid.
Question: I have always operated my really small home business using the cash accounting method only since the beginning. Do I really need to file Form 3115 if I have never changed and will never change and never request for an accounting change? Thank you.
Answer: With a business, you have a choice of filing the Form 3115 or making 3 safe harbor elections with each tax return. If you don’t do either, you will not be able to expense any material or supply until used. If you buy a case of paper, you have to put it in inventory as an asset. And then, ream by ream, you can expense it. What a headache!