Last Monday, I talked about the requirement for every business and real estate investment entity to file at least one Form 3115 this year. I talked about the fact that the IRS would be looking at every business that hadn’t filed for their audit pool. And I got questions whether preparing the Form 3115 was really that necessary. It’s a complicated form and you’ll have to pay your CPA more than usual to prepare these forms.
So, I’m asked, what if someone does get audited? They’ve got nothing to hide. Well, I want to answer that question first. What does happen if you don’t file Form 3115 and you should have?
Some of the things that can happen if you have a business or real estate investments and do not follow the new tangible property regulations (TPR):
(1) The rules have changed for repair & maintenance costs. If you can’t immediately expense them, you will have to capitalize them but not be able to depreciate them.
(2) If you are audited and it is found that you are not following the new rules, you will be denied depreciation on the assets. TPR 1.1016-3
(3) You will not be able to deduct repair and maintenance costs that would otherwise be deductible. 1.162-4
(4) You will not be able to deduct up to $200 per unit of property for non-incidental materials and supplies that would otherwise be deductible.
(5) You will not be able to use the new TPR rules for non-incidental and incidental materials and supplies. (Method 186 & 187)
(6) Miss the ability to define a unit of property under new regs 1.263(a)-3(e) so that you lose the ability to deduct the total basis.
(7) You won’t be able to depreciate amounts paid to acquire or produce tangible property.
(8) You won’t be able to use the new routine maintenance safe harbor.
And, as I talked about in the last blog post, you have a much higher chance of audit if you fail to file the proper Forms 3115 for Change in Accounting Method. So, what happens in real life?
After you find out you’ve lost all of these new things because you failed to file the proper forms in 2114, and after you’ve paid the extra tax and paid the penalties, you’ll end up filing the Form 3115 anyway. The problem is that you missed the window to file this form free with the IRS. As soon as this window closes, you’ll have to pay $7,000 to file it.
More tax, more penalties and a fee to file what you should have filed in 2014 for free….what’s your choice?
There have now been two postings suggesting that ALL businesses should file form 3115, however, it is not 100% clear if it is referring only to businesses that deal with real estate. It would seem odd for my C-corp that does not have any real estate dealings and does not depreciate anything to file a form intended to change method of accounting. If you can reply directly or maybe in your next posting on the topic if could you clarify whether this recommendation is indeed for all business, real estate or otherwise, and if it is a recommendation even for businesses that don’t depreciate anything (like mine) what the logic would be for filing for such a change when there is no change being requested? (I know, I used logic when referring to something IRS related…..good one, eh?)
Jim, First of all —- IRS logic? Is that an oxymoron?
For sure, all real estate investment companies need to file the Form 3115. If your business has any asset that you depreciate or repair, or you have materials & supplies, your business will need to file. Other than that, you probably do not need to file. However the IRS instructions to auditors is to target all businesses that have not filed a Form 3115. It seems like it’s a good defensive move to file.