IRS Notice Extends Ability to Benefit from Tangible Property Regulations
February 14, 2017
As many business taxpayers know, the 2014 tax year marked a shift in rules for what expenditures should be capitalized and for how long they should be depreciated. The Tangible Asset Property Regulations (TARs), issued in 2013 (T.D. 9636) and 2014 (T.D. 9689), helped to clarify years of conflicting case law and provide a framework from which taxpayers have benefited from certain deductions.
Now more than three years and many notices later, the IRS has issued a new notice that allows taxpayers to better take advantage of TARs. Issued in December, Notice 2017-6 extends for one year the Five-Year Eligibility Rule for making automatic accounting method changes to comply with TARs.
Could Notice 2017-6 benefit your tax deductions for 2016? Let’s take a moment to review the evolution of TARs and how the latest IRS notice may impact you and your business.
The Evolution of TARs Adoption Methods
For tax years beginning on or after January 1, 2014, all taxpayers with depreciable assets or who buy, sell, improve, or dispose of assets had to comply with TARs. Compliance required the taxpayer to file a change in accounting method and complete an IRS Form 3115.
While TARs provided more objective measurements and guidance for delineating between deductible business expenses and capital expenditures, its rollout was exceedingly difficult. As a result, the IRS released a streamlined adoption method, which allowed some taxpayers to simply adopt the new rules going forward and not file a Form 3115.
This alternative approach was quick and easy and certainly made sense for certain taxpayers. However, it was a prospective approach, meaning it only applied to current and future periods. Since it did not allow taxpayers to “catch up” their books, many businesses, particularly those that owned real estate, found themselves without an immediate and significant expense that a Form 3115 and catchup would allow.
Automatic Accounting Method Changes and the Five-Year Eligibility Rule
A change in accounting method can be automatic (completed without IRS consent) or non-automatic. All accounting method changes require IRS permission and a substantial user fee, unless the change type is specifically deemed to be automatic eligible. Adoption of TARs is one such change.
To make an automatic change, taxpayers must have not made a change in accounting method related to the same item within the last five years (the Five-Year Eligibility Rule). Former TARs rules, including Rev. Proc. 2016-29, waived this rule for any tax year beginning before January 1, 2016.
For most taxpayers, the ability to make an automatic change and take a current deduction ended with the filing of their 2015 return.
The Impact of IRS Notice 2017-6 on You and Your Business
With the release of Notice 2017-6, the waiver of the Five-Year Eligibility Rule has been extended for one year. Taxpayers can now make changes on their 2016 tax returns using the automatic consent procedures to further comply with TARs. In addition, taxpayers who have already adopted TARs can go back and correct changes previously made and potentially benefit from any associated “catch up expense”.
Taxpayers should discuss Notice 2017-6 with their tax preparer to determine if there is an opportunity to increase tax deductions for 2016 by preparing a Form 3115.
Want more information on TARs and how to uncover other key tax savings opportunities? SC&H Group’s Tax Services team can help you get the most out of your return. Contact us here for more information.