The Form 3115 Conundrum

[Accounting Today readers: Here’s a link to Fail, Caesar.]

Form 3115 is the form used to request an accounting method change. For example, if your business is changing from cash to accrual, this form is filed. Many such changes are automatic; you just notify the IRS, file the paperwork, and life moves on. Of course, even the simple is complex: Form 3115 gets filed twice: once with your tax return, and once to either Ogden, Utah or to Washington, DC.

This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 for every taxpayer who has equipment, depreciation, rental property, inventory, etc.? And no one seems to know the answer.

The cause of the problem is the new repair/capitalization/property regulations. These new regulations are effective for the 2014 tax year, and specify how certain things are supposed to be done. Why is this a big issue? Because Form 3115 is complex: The IRS estimates it will take 24 work hours to complete one form for one client.

It’s a certainty that companies that manufacture or have inventory will need to file Form 3115 with their returns. But what about someone with a side business? A couple who rents out their old home? There is a 12-page thread on TaxProTalk on this subject and I don’t think anyone there has a good handle on this.

Let’s take a real world example: John and Mary Smith. The Smiths own one residential rental property here in Las Vegas. The property has been depreciated for the last five years. In 2013, they put in a new garage door and are depreciating it. Their tax return is otherwise quite blase: they have wage income, a home mortgage, property tax, and some minor investment income.

I still don’t have a good answer for this. I’d love to hear from other tax professionals on this issue.

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3 Responses to “The Form 3115 Conundrum”

  1. […] Fox, The Form 3115 Conundrum: “This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 […]

  2. Dennis C. Ponton, CPA says:

    The identifiable UOP is the structure, of which the garage door is a component. Answer these questions to determine the treatment:
    1) Did the condition exist at the time the property was bought? Doesn’t sound like it so – No
    2) Is this a material addition to the UOP? No
    3) Does the door increase the property’s capacity? No
    4) Does the door materially increase the UOP productivity, efficiency, strength, quality, or output – No
    5) Is this the replacement of a major component or a substantial structural part of the building – No – the door surface to the total of the building is very small – assumed to be less than 30%
    6) Did the taxpayer take a loss deduction on the old door? If yes, capitalize. If No, continue.
    7) Did the taxpayer sell the old garage door at a gain? If yes, capitalize. If No, continue.
    8) Did the taxpayer allow the old door to deteriorate to a state of disrepair so that it was no longer functional? Sure hope not. Ok, NO.
    If you got through to here with all No answers, it is a repair and a 3115 should be filed with a negative 481(a) adjustment. Failure do so means the application of an inconsistent method and could result in the disallowance of future depreciation deductions.
    That’s my take on this beast.

  3. I cannot imagine that the IRS will not back off on this (the 3115, not the regs), but I’ve been wrong before. It might be best to file extensions on everyone with this issue and wait to see what happens. I don’t want to be first in the door with the 3115.