Guess what, the IRS made a boo-boo again.
What about, this time? Trying to force almost anyone with a business or rental income to file form 3115 with their 2014 tax returns.
What’s that, you say? Never heard of that form? It is only for corporations, you’ve heard? Only for big business?
Well, guess what – until last Friday anyone with a rental or a business was required to file this form for the tax year 2014. Yes, that tax year for which we all have started preparing our tax returns.
The form is for changing methods of accounting, not something any of you individual tax payers ever heard of or thought you’d need to deal with. And the reason it was required is because the IRS had issued new and revised regulations regarding handling maintenance, repairs and capital assets on your tax return.
As of 2014, the new rules are in place, and the IRS required, in the original regulations, everyone to file a formal change of accounting methods to adopt the new rules. Not just adopt them from now on – but adopt them retroactively, calculating the difference in your income between your original treatment of the covered issues and the new regulations. Basically, this means going over your depreciation schedule and repair and maintenance expenses, and checking which of the capitalized expenditures should have been expensed per the new regulations, and which of the expenditures that were expensed should have been capitalized. For how long? Technically – since the beginning of your business/rental activity. That could be decades! That’s what the form 3115 is for, in this case. The resulting difference goes on that form, and from there to your tax returns in form of sec. 481(a) adjustment (positive or negative).
Learning how to fill this form and filling it is estimated by the OMB at about 60 hours. Imagine paying your accountant for 60 hours of work for doing that. Having a heart attack yet?
Obviously, accountants don’t charge every client for the 60 hours, but still – each client would add $100 (at least, per my CPA) to his tax preparation expenses. Those of us who would rather prepare themselves were forced to pay to a professional, since this is not a form you can do by yourself and is not supported by the major tax preparation software providers anyway.
So what happened last Friday?
The IRS backpedaled on the requirement and issued a new guidance exempting those with less than $10M of assets and $10M of revenue from the requirement to file the form 3115 and adopt the regulations retroactively. Those “small taxpayers” (mom-and-pop businesses and people with rental income) can now adopt the regulations going forward (without the need to audit/fix prior capitalization/expense decisions).
While the decision is good for taxpayers in general, it is a tad too late for those who had already hired accountants to deal with this mess, and those who wanted to file early (after all, the season started a month ago) and already filed their paperwork. These people have already paid thousands of dollars to tax preparers for a service they no longer need. Same goes for the tax preparers themselves, who spend the entire year preparing for this mess (widely anticipated, and warned about by the AICPA and NTPA) and paying hundreds and thousands of dollars for training which many of them no longer need.
Who is going to compensate the tax payers and tax preparers for all this mess the IRS got us into? Well, I hope my CPA won’t charge me extra for this…
Your Little Advisor.
PS: It may be worth your while to do the whole form 3115 thing, if the sec. 481 adjustment for you will be negative (i.e.: you can get a current tax break instead of continuing depreciating small assets). Talk to your tax adviser.
NOTE: This is not a tax advice and please don’t rely on this blog for any tax-related matters. In case of doubt talk to a licensed tax adviser - EA/CPA licensed in your State.