The Infamous Form 3115 Filing of 2015

This post is in: Blog, Real Estate

Form 3115 2015If 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.

Tangible Property RegulationsThat 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!


  1. Jim Biondo says:

    Could you explain how the questioner would have to choose between filing form 3115 and making 3 safe harbor elections? Why 3 safe harbor elections, are they based on a dollar amount or an asset quantity? And where would one make a safe harbor election on a return for a C corp?

  2. Diane Kennedy says:

    This is one of those questions where you really need to have a tax professional involved. There isn’t a short answer here.

    There are three elections that you need to make annually as a result of the Tangible Property Regulations. Or, you can file Form 3115 and permanently make that choice. The info on what they are and how they work is included in the TPRs. Elections are generally attached to a tax return.

  3. Diane Kennedy says:

    Jim, the IRS issued Revenue Procedure 2015-20 which makes some fairly large changes to what needs to be filed. This was issued 2/13/15 and is retroactive to 1/1/2014. My recommendation is to just wait on filing until this sorts out.

  4. Larisa says:

    Hello Diane,

    Could you please provide your expert opinion on the subject of the relief for small businesses & audit proptection on this example:

    Example: ABC company in 2012 added insulation to the building that increased the efficiency of the building. ABC company correctly (accordingly to old repair/improvement rules) deducted the cost of insulation. Now by new 2014 rules it would be improvement, but by 2012 old repair/improvement rules it was repair/deduction.

    In 2014 ABC as a small business adopts the simplified procedure of Rev. Proc. 2015-20 and does not file form 3115. Since there is no audit protection for 2012 because no form 3115 was filed, the IRS agent could disallow the deduction for the insulation, and also disallow the retroactive depreciation deduction because it has not been claimed in the year “allowed or allowable”.

    Here is my question for you:

    1) Could IRS disallow both repair and depreciation deduction because the ABC company did not follow the NEW 2014 IRS repair regs and did not classify the work as improvement (even though by old rules ABC correctly classified repairs as repairs in 2012)?
    2) Could IRS disallow both repair and depreciation deduction because the ABC company made mistake in 2012 and did not follow the OLD IRS repair regs and incorrectly classified the work as repair/deduction while it should had been classified as improvement in 2012 by OLD rules?

    This makes the whole world of difference for all small businesses. If your answer is option #1, then all small businesses who adopt the simplified procedure of Rev. Proc. 2015-20 and do not file form 3115 in 2014 will be severely penalized for using simplified procedure and not adopting new regs in 2012. But Rev. Proc. 2015-20 specifically allow small businesses to apply new repair regs prospectively from January 01, 2014. So how IRS can penalized small businesses for following new repair regs in 2012 when IRS specifically allowed to apply them from 2014?

    In my opinion, only option #2 makes sense. If the small business made mistake in 2012 and did not follow the OLD IRS repair regs and incorrectly classified the work as repair/deduction while it should had been classified as improvement in 2012 by OLD rules, then yes- there is no audit protection and penalties.

    If you please could be so kind and clarify this issue for me and all small businesses, I would greatly appreciate it. This is probably the most important question regarding relief for small businesses & audit proptection.

    Thank you

  5. Diane Kennedy says:

    Larisa, first of all, I think these regs are a mess. The fact that they added in the small business safe harbor on 2/13/15 retro to 1/1/2014 when they had YEARS to sort this out is concerning.

    I’m guessing from the language in your comment that you are a tax professional. If you’re the one preparing the return, I think I would go with my best instinct (I agree option #2) and add a disclosure. I know that no one in the literature or CPE courses is recommending disclosure, but I’m a big one for disclosing when I’m not sure what to do. I think that Rev Proc 2015-20 is giving the small business relief and so it wouldn’t make sense that the IRS could backdoor an issue with Option 1.

    But, like I said, it’s a mess. That’s my best guess.

  6. Larisa says:

    Thank you for your response. I am glad to hear that you agree that only option #2 makes sense. What kind of disclosure would you recommend- could you please be more specific?
    I am actually not a tax professional. I am a small business owner and I do my own bookkeeping and taxes because I cannot afford to pay CPA for that yet ( even though I do have some accounting background). I am just trying to figure out what should I do with my own taxes since my business has assets and depreciation.
    I went to a paid CalCPA webinar on this topic and the example I asked you about is from that webinar. The CalCPA presenter specifically said that the option #1 is what is going to happen. And it doesn’t make sense to me.
    That is why I asked your opinion since you are an expert and I highly respect your opinion.
    Thank you

  7. Larisa says:

    And one more question. If I do file form 3115 and scrub my depreciation schedules and make 481 adjustments for Federal tax returns, what should I do about these adjustments and changes for my CA state tax return? How do I show my changed assets and depreciation and neccessary adjustments on CA return?

    Thank you

  8. Charlie says:

    What is the deadline for filing 3115s?

    If I file for an extension, can I file them up to the extension deadline?

  9. Diane Kennedy says:

    On February 13, 2014, Rev Proc 2014-20 was issued which gives exclusion for small businesses to avoid Form 3115 and just make elections on the tax return.

    My suggestion is still that you need to have a tax professional help you with this. It’s complicated and the elections could have far reaching implications

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