3115 tangible property

3115: Tangible Property Regulations 1
3115: Tangible Property Regulations
Kaitlyn M. Cook
University of Mount Union

Table of contents
Abstract……………………………………………………………………………………………3
Statement of Problem………………………………………………………………………..4
Significance of Problem……………………………………………………………………. 4
Purpose of the Research…………………………………………………………………… 4
Limitation ………………………………………………………………………………………...5
Definition …………………………………………………………………………………………5
Literature review ……………………………………………………………………………...6
Opinion…………………………………………………………………………………………….14
Conclusion………………………………………………………………………………………..15
References………………………………………………………………………………………..16

The 3115 tangible property regulations provide many benefits for taxpayers,
however these benefits cannot be achieved without overcoming the blatantly
obvious issues that are brought forth. The lack of knowledge by the general public of
what the tangible property regulations are and how they can be beneficial is the
major issue. Also the added cost of having a 3115 form prepared by a tax
professional can be an added issue. The significance of this problem simply stated is
that business owners are missing out on tax breaks. The limitation that comes about
with this topic is that since the tangible property regulations weren’t finalized until
late 2014, it is very difficult to find scholarly articles on the topic. The tangible
property regulations by definition enable taxpayers to expense assets that were
capitalized incorrectly in prior years. Filing form 3115 allows a taxpayer to request
a change in accounting methods, therefore taking advantage of the tangible property
regulations. This can cause a drastic decrease in income that can provide benefit for
all business owners, but most specifically sole proprietors with Schedule C/E/or F.
Tax Experts have written articles on the positives and negatives of the tangible
property regulations and filing a 3115 form. For the most part, the resounding
opinion of these professionals is to file and my opinion after doing research is also
to file.

The 3115 tangible property regulations are currently causing a major issue
in CPA firms across America. The issue is not an issue of principle, however an issue
of ignorance. The tangible property regulations that were passed by Congress in late
2013 can cause major tax benefits for business owners, more specifically sole
proprietors; however, the lack of knowledge about these regulations by the average
business owner is bringing about major issues. Taxpayers feel weary to spend the
extra money to have tax professionals prepare the 3115 tax form, a form which can
take up to 80 hours to appropriately prepare, because they are unaware of the
substantial benefits that can be provided.
Another issue that arises with these regulations is that since they are so new,
there are still many grey areas within the tax code. It can be very confusing as to
what exactly qualifies under these regulations. Also in February, the IRS released an
update to these regulations that now did not require small businesses to file the
3115 to take advantage of the tangible property regulations.
The significance of the issues regarding the 3115 tangible property
regulations is that since taxpayers are unaware of the benefits, they are less likely to
take advantage of the regs that were passed specifically to financially benefit them.
As accountants this problem should be very significant to us. If taxpayers are not
taking advantage of the opportunities allowed through the filing of the form 3115,
we are also missing out on the opportunity to prepare these forms as tax
professionals.
The purpose of my research is to better understand the issues and benefits of
the 3115 tangible property regulations. After understanding these issues, I can

communicate my knowledge with other tax professionals and taxpayers to help
them make the correct decision in whether or not to file the 3115 tax form. I chose
to write about this topic also because of my experience as an intern as Hill, Barth &
King CPA’s and Consultants. As an intern during tax season, I became aware of how
important it was to be knowledgeable about these regulations. I also became aware
of the disconnect between this importance and the actual knowledge possessed by
not only the general public, but also by tax professionals.
The limitation of researching the 3115 tangible property regulations is that
since the topic is so new, it is very hard to find prior scholarly research and opinions
on the topic. Also, since the regulations were just passed in late 2014, there has only
been one trial tax season, so the issues that are currently prevalent may be
completely irrelevant by next tax season.
Before delving into my literature review, the definition of the 3115 tangible
property regulations will allow for a better understanding of the issues that come
along with it. The purpose of the form 3115 is to request a change in accounting
methods with the IRS. The request can be made in one of two ways; either one can
receive automatic consent or they can file for advance consent By filing this form, a
business owner is able to take apart in the new tangible property regulations. These
tangible property regulations allow business owners to expense items that were
capitalized in prior years. By expensing items that were formerly capitalized, a
taxpayers’ net income can be drastically decreased. This in turn can create major tax
benefits. Another part of the regulations involves the automatic expensing of

anything classified as materials or supplies up to certain thresholds by filing the de
minimis safe harbor election.
Although the topic is relatively new, the issues with the 3115 tangible
property regulations are still a much talked about subject in the accounting world.
The Internal Revenue Code, section 162 states that you can deduct expenses
incurred for the upkeep of your business. On the other hand section 263 requires
capitalization of costs to “acquire, produce, or improve tangible property” (IRS,
2015). Decisions made to determine which of these categories the expense fell
under were once left up to the taxpayer. With the issuance of the tangible property
regulations, the decision was now made by the IRS. Although this seemed to solve
the issue, it left many grey areas.
As made evident by the extensive FAQ section on the IRS website, the
regulations left many taxpayers confused. The first question listed “Do the tangible
property regulations apply to you?” (IRS, 2015) was a question asked by many
taxpayers this tax season.
The IRS (2015) tackles this question by stating the following:
The final regulations apply to anyone who pays or incurs amounts to acquire,
produce, or improve tangible real or personal property. These regulations
apply to corporations, S corporations, partnerships, LLCs, and individuals
filing a Form 1040 with Schedule C, E, or F. The final regulations affect you if
you incur amounts to acquire, produce or improve tangible real or personal
property in carrying on your trades or businesses. The rules are most
significant for those that regularly incur large capital expenditures, e.g.,

electric utilities, telecommunications companies, and businesses with
substantial real estate holdings. The final regulations are effective for taxable
years beginning on or after Jan. 1, 2014. (Do the tangible property
regulations apply to you?)
Although this does provide some clarification on whether or not the regulations
apply to you, the next issue that arises is in the determination of expensing assets
reported in past years that were capitalized or leaving them as they were priorly
reported.
The Journal of Accountancy sheds some light of this issue, giving better
definition to the BAR (betterment, expenditure, restoration) tests that are used in
this determination.
An article (2014) written by Christian Wood states:
Generally, an expenditure results in a betterment if it ameliorates a condition
or defect that existed before the acquisition of the property or arose during
the production of the property; is for a material addition to the property; or
increases the property’s productivity, efficiency, strength, etc. An
expenditure results in an adaptation to a new or different use if it adapts the
unit of property to a use inconsistent with the taxpayer’s intended ordinary
use at the time the taxpayer originally placed the property into service. An
expenditure results in a restoration of an asset if the expenditure (1) restores
basis that has been taken into account (Improvements).
This article helps to better explain the BAR tests, but unless you are a tax
professional, the wording can be very confusing, and is not common knowledge.

Because the determination of the outcomes of the BAR tests require
extensive accounting knowledge, it is best for a CPA to handle the filing of the 3115.
According to Erb (2015) because form 3115 is such an extensive tax form, it can
cause a drastic increase in the cost of the preparation of a business’s tax return (Erb,
2015). Many small businesses which are already struggling to make ends meet, who
coincidently would benefit the most from filing form 3115, can simply not afford to
pay this extra fee. According to CPA Greg Freyman (2015) “[it can take] 20 hours to
learn the law, 39 hours to review work papers and 24 hours to prepare the form”
(What if our business still needs to file form 3115?). This can easily translate to
hundreds or even thousands of dollars, depending on a business’s size, in labor
added to their tax return fee. Another added cost that falls under the 3115 filing is
the de minimis safe harbor election. According to Nathan Clark (2014), This
election, which allows the taxpayer to automatically expense any materials or
supplies under $500, does not take much time to file, but the documentation will
add to the cost of the tax preparation. (Clark, 2014)
Stemming from the issue of added cost, is the issue of necessary knowledge.
Although a tax professional will likely be knowledgeable in how to prepare your
form 3115, the business owner must be able to provide the information necessary to
deem what adjustments can be made.
As stated by Hall (2015):
The major downside with Form 3115 is that it is an extremely complex tax
form… Form 3115 is so complex because it requires you to look at many
different aspects of your business and properties. It will require that you

develop schedules showing adjustments for repairs, capital expenses, and
depreciation… You will want to review these [pre-2014 depreciation]
schedules to determine what items you are still depreciating and whether
any of these items can be classified as currently deductible expenses under
the new regulations. (Hall, 2015)
Unfortunately, if a business owner does not generally contact a CPA for tax purposes
and does not have good records, this can be nearly impossible to do. This can add
more complexity to the filing of the form 3115.
As I stated earlier, a major issue with the 3115 tangible property regulations
is that since the regs were just passed at the end of 2014, taxpayers are ignorant
about its derivation. CPA John Trudeau gave an example of a question he had
received from a client after preparing their form 3115:
I pay you to prepare my taxes in accordance with all rules and regulations.
The reason I pay you is because I don’t understand all the rules and want to
be compliant with the law. Why should I pay to fix your mistake? (John
Trudeau & Co., P.A., n.d.)
The confusion that comes with the filing of the form 3115 is clearly an issue that is
hard for tax preparers to deal with. There is no way that when the tax preparer
capitalized assets in prior years they would have known that these regulations
would be created. The expensing of priorly capitalized assets through the filing of
form 3115 was put into tax code as a benefit for the taxpayer. Communicating
effectively with the business owners that would benefit from filing can be difficult
when there is not widespread knowledge on the regulations.

Another issue that comes with the lack of widespread knowledge on the
3115 tangible property regulations is that the form 3115 must be filed before the
2014 tax return.
According to Abdoo (n.d.):
In order to have a valid Form 3115 filing under the automatic method change
procedures, the taxpayer must file the form with the IRS (either with the IRS
National Office in Washington D.C. or Ogden, UT, as applicable) on or before
the date the taxpayer timely files its tax return for the year of change
(including extensions). Additionally, the taxpayer must attach a copy of the
form to its timely filed tax return for such year. If a taxpayer fails to do this,
there is a limited ability to file a Form 3115 with an amended return;
however, this is only available within six months of the due date of the
taxpayer’s return (excluding extensions). (May an automatic Form 3115 be
filed with an extension, n.d.)
In addition to the 3115 having to be filed before the tax return, as stated by
Fishman (n.d.) the only way to obtain the added audit protection for years prior to
2014, that is included in the new regulations, is to file form 3115 in 2014. Because of
this, it is imperative that tax professionals communicate the benefits of filing.
Unfortunately, however, sole proprietors that file their taxes without the help of a
professional or professionals that are not educated on the 3115 tangible property
regulations could easily have filed returns this past year without the 3115 and given
up the opportunity of the added audit protection. (n.d.)

In addition to the problems that arise from not being educated about the
filing of the 3115 for the taxpayer, there are also consequences for the preparer.
According to Wallace (2015) preparers risk being fined for “Willful or reckless
conduct”. Willful or reckless conduct can result in a $5000 fine. This can happen if a
preparer disregards regulations purposefully and because of that, the tax results in
an understatement. Since not complying with the tangible property regulations is a
blatant example of willful or reckless conduct, it is imperative that tax professionals
properly explain the importance of this form to their appropriate clients (Wallace,
2015)
An issue with the 3115 tangible property regulations that affected many tax
firms across the country was when the IRS made changes to the tangible property
regulations in February of this year.
As summarized by the AICPA (2015):
For purposes of the revenue procedure, a small business is defined as one
with total assets of less than $10 million on the first day of the tax year for
which the accounting method change is effective or average annual gross
receipts of $10 million or less for the prior three tax years. The IRS reports
that since issuing the final repair regulations it has received numerous
requests to make the process of applying the regulations simpler for small
businesses and especially to allow them to apply the new rules on a cut-off
basis and without filing Form 3115. (para. 2)

The major issue that firms had with this change in the tangible property regulations
was not the content of the change, which proves to be very beneficial for small
business owners, but the timing of the release of these changes. Many firms had
already prepared the 3115 forms for these small businesses that no longer needed
to file. This caused major issues in firms where the tax form had already been filed.
Formerly chargeable work was no longer required so firms had to make an ethical
decision whether to continue to bill the client for work they had done that was now
deemed unnecessary or to take a loss in chargeable work hours.
An issue with the filing of the 3115 form that is so blatant that many people
may fail to recognize is so eloquently stated by journalist for Forbes, Peter J Reilly.
According to Reilly (2015):
“Right now the more respectable contingent of the tax preparer community
is preparing to cut down a couple of forests and ship millions of pointless
forms to Ogden, UT. Only Mr. Koskinen can save those trees…. In 2011 there
were 5.8 million corporate returns filed and 3.0 million partnerships. About
23 million individual returns had Schedule C. 1.9 million had Schedule F. I’m
not even going to consider the almost 17 million that had Schedule E..”
Reilly tries to make a point of how since the 3115’s have to be paper filed
there is an excessive amount of paperwork that will be received by the IRS. He goes
on to discuss why he considers the 3115 form a waste of time and effort for many
reasons. For instance, Reilly says it is ridiculous to file paperwork requesting a

change in accounting methods when accountants know the importance of properly
documenting method changes and that it cannot be done regularly. He also
discusses the confusion that the 3115 brings about with the 2 two different ways to
request a change in accounting methods. The difference between when a business
can receive automatic consent and when they need to file advance consent is an
outstanding issue that confuses business owners as well as tax professionals.
Another outstanding issue with the 3115 regulations is that although there
are great benefits for taxpayers who capitalized assets in prior years that under new
regulations can be expensed, if under the new regulations assets were expensed that
should have been capitalized,, a tax penalty will be owed.
In an example given by Gilabert (2015) she states:
Let’s say you obtain a new client that is a manufacturer of widgets. The
company has been in existence for several years. You discover while
preparing the 2014 tax return that the prior tax preparer was not
capitalizing required costs into inventory under section 263A. You know that
a Form 3115 is necessary to correct this erroneous accounting method, and
you determine that this is an “automatic change”.
Gilabert (2015) goes on to say that just like filing a 3115 for the purposes of
recovering expenses that were capitalized, the tax payer will now owe a liability.
(Gilabert, 2015)

Although this could potentially be costly for the taxpayer, and obviously they
would be opposed to the filing the 3115 if it meant a tax liability for them, we are
reminded that it is ethically the right thing to do. Also Erb (2015) states that
although a tax liability may be owed, if filing a 3115, the taxpayer has the benefit of
paying the money to the IRS over a four year time span. Whereas, without the filing,
it would be due all at once. (Erb, 2015)
After extensive research and hands on experience, I’d have to say without a
doubt that I believe businesses and individuals with SCH C/E/F should file the form
3115 in conjunction with the tangible property regulations. There are so many
benefits that taxpayers can take advantage of when filing the form 3115 in the
current tax year. As I mentioned earlier there is an added audit protection with the
filing of the form in 2014, whereas taxpayers who choose not to file (or wait to file
in another year) will be at an increased risk of being audited. Taxpayers are also
missing out on the opportunity to recover expenses on tangible property that can
now be expensed, but was capitalized in prior years.
Another reason that I believe the form 3115 should be filed, despite the
issues that come along with its filing, is that according to Wallace (2015) after 2014
if a business owner requests consent for a non-automatic change relating to tangible
property regulations, there is a $7,000 fee (Wallace, 2015). Not taking advantage of
the tangible property regulations means not being able to take advantage of the de
minimis safe harbor election and does not allow businesses to automatically
expenses materials or supplies under $500. Also, tax codes are based on decisions

by the courts and the regulations were passed as a piece of legislation, and tax law is
ever changing. That being said, this could very easily be the last year that anyone
could take advantage of the tax benefits that come along with the filing of the 3115
in conjunction with the tangible property regulations.
My opinion on this topic has changed greatly since starting this research
paper. When I first discovered this topic at my internship, I thought, like most
improperly informed members of society, that filing the form 3115 was a waste of
time. After extensive research and hands on experience I have realized how
beneficial this can truly be for taxpayers. Although it is an added cost, the decrease
in one’s tax liability from increased expenses almost always trumps that extra
charge.
Another reason that my opinion is in support of the filing of the form 3115 in
conjunction with the tangible property regulations is the benefit for tax preparers..
As a tax accountant, I can appreciate the additional work that these forms have
brought to firms nationwide. Because the form is in many ways very complicated,
business owners resorted to allowing their accountant to prepare the form for them.
This in turn helps to boost the “Accounting economy”.
In conclusion, there are many complex issues with filing the form 3115 to
take advantage of the new tangible property regulations. The significance of these
issues is that unless they are addressed business owners could be missing out on
potential significant tax breaks. There are many articles that address the issues that
come with the form 3115 and the tangible property regulations. However, overall

most professionals believe that filing form 3115 is a safeguard and encourage
business owners to do so because if the significant benefits. After extensive research
and hands on experience, my opinion would be the same- absolutely file.

Works Cited
Abdoo, K. (2014, March 5). Taking transition: Transition guidance under the tangible
property regulations. Retrieved April 1, 2015, from McGladrey:
http://mcgladrey.com/content/mcgladrey/en_US/events/taking-action-transition-
guidance-under-the-tangible-property-re.html
AICPA. (n.d.). Quick Summary of Final Tangible Property Regulations. Retrieved April
1, 2015, from AICPA:
http://www.aicpa.org/InterestAreas/Tax/Resources/Compliance/DownloadableD
ocuments/Quick%20Summary%20Chart%20of%20Final%20Tangible%20Propert
y%20Regulations.pdf
AICPA. (2015, February 13). Small Businesses Won’t Have to File Form 3115 to
Comply with Repair Regs. . Retrieved April 1, 2015, from AICPA:
http://www.aicpa.org/INTERESTAREAS/TAX/NEWSANDPUBLICATIONS/TAXNEW
S/Pages/20150213.aspx
AICPA. (2014, May 1). Tangible Property Regulations. Retrieved April 1, 2015, from
AICPA: http://www.aicpa.org/publications/taxadviser/2014/may/pages/clinic-
story-04.aspx
Erb, K. P. (2015, January 28). Form 3115 Adds Confusion and Cost- But May be
required for 2015. Retrieved April 1, 2015, from Forbes:
http://www.forbes.com/sites/kellyphillipserb/2015/01/28/form-3115-adds-
confusion-cost-but-may-be-required-for-2015/
Fishman, S. (n.d.). Accounting Method Change Filing Requirement Under IRS Repair
Regs for Businesses that Own Property. Retrieved April 1, 2015, from Nolo Law for
all: http://www.nolo.com/legal-encyclopedia/accounting-method-change-filing-
requirement-under-irs-repair-regs-businesses-own-property
F
reyman, G. (2015, February 24). Does your business need to file form 3115? Retrieved
April 1, 2015, from Freyman CPA: http://www.taxproff.com/business-tax/business-
need-file-form-3115/
Gilbert, D. (2015, March 10). Why you should not hate 3115. Retrieved April 1, 2015,
from Diane Gilbert Tax: http://www.gilaberttax.com/2015/03/10/do-not-hate-
form-3115/
Hall, B. (2015, January 12). You Likely Need to File IRS Form 3115- And It's Costly.
Retrieved April 1, 2015, from Bigger Pockets:
http://www.biggerpockets.com/blogs/6032/blog_posts/41751-you-likely-need-to-
file-irs-form-3115-this-year---and-its-costly

IRS. (n.d.). Instructions for Form 3115. Retrieved April 1, 2015, from IRS:
http://www.irs.gov/instructions/i3115/ch02.html
IRS. (2015, March 15). Tangible Property Regulations. Retrieved April 1, 2015, from
IRS: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-
Property-Final-Regulations
Reilly, P. J. (2015, February 2). Mr. Koskinen's Last Chance To End The Form
3115 Madness. Retrieved April 1, 2015, from Forbes:
http://www.forbes.com/sites/peterjreilly/2015/02/05/mr-koskinen-last-chance-
to-stop-the-form-3115-madness/
Trudeau, J. (n.d.). Attention:Action required. Retrieved April 1, 2015, from John
Trudeau CPA:
http://www.trudeaucpa.com/media/ACTION%20REQUIRED%20FOR%20ALL%20
BUSINESSES%20AND%20LANDLORDS.pdf
Wallace, E. (2014, October 17). Consequences of Not Filing the Required Tangible
Property Regulation 3115s by Tax Year 2014. Retrieved April 1, 2015, from B&R
Boyer & Ritter LLC: https://tprtoolsandtemplates.com/consequences-of-not-filing-
the-required-tangible-property-regulation-3115s-by-tax-year-2014/
Wood, C. (2014, February 1). Implementing the new tangible property regulations.
Retrieved April 1, 2015, from Journal of Accountancy:
http://journalofaccountancy.com/issues/2014/feb/20137725.html

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