Businesses and rental property owners knew that time was running out to take advantage of repair regulations tax savings through the tangible property regulations (TPRs). Fortunately for taxpayers, the IRS recently released IRS Notice 2017-6, which extends the time to make automatic change of accounting methods to continue to take advantage of the TPRs. This includes making accounting method changes for repair and maintenance expenses, depreciation, and certain property dispositions. The extension may also present an additional tax savings opportunity for taxpayers who previously made accounting method changes to comply with the TPRs. While this has now been extended the past two years, experts expect this will be the last opportunity to take advantage of the automatic method changes.
For accountants, this additional extension solves the problem that many tax advisors challenged when the tangible property regulation guidance first came out. Tax advisors and their clients complained that the IRS’s guidance was not issued in time for them to fully analyze and comply with the complex rules. Additionally, the IRS continued to change the guidance on the regulations as the filing season went on, which did not help matters.
Catching Up
For taxpayers, this notice allows them to adopt certain method changes more than once in a five-year period, which generally is not allowed. Taxpayers who previously made certain accounting method changes to comply with the repair regulations can file a Form 3115 with their timely filed 2016 tax returns to make adjustments to previous capital expenditures and expenses. This could result in larger Section 481 catch-up adjustments in 2016 for expenses incurred in prior years.
Limitations
The Notice only covers certain accounting method changes that have the biggest effect on the repair regulations, including the following:
- From one permissible to another permissible MACRS depreciation method.
- The treatment of a disposition of a building or structural component or other tangible depreciable asset.
- From expensing to deducting repair and maintenance expenses, including the identification of the unit of property.
For small taxpayers who chose to opt out of the repair regulation changes in 2014, as the IRS allowed, Notice 2017-6 only allows for those taxpayers to go back and pick up expenses incurred in 2014-2016. These small taxpayers cannot go back and pick up pre-2014 expenses via a Section 481 catch-up adjustment, as Notice 2017-6 did not waive the small taxpayer limitation.
Taking advantage of these accounting method changes presents a huge opportunity to accelerate deductions in the 2016 tax year, which could result in permanent tax savings. While no one can be sure exactly what tax law changes are going to happen, the most likely change will be in the form of lower business and individual tax rates beginning in possibly 2017. Contact an Anders advisor to discuss the repair regulations further and see if these changes can affect you.
