What is Form 3115? According to the IRS, the form is filed “to request a change in either an overall method of accounting or the accounting treatment of any item.” What would necessitate this change? You could have a client, for example, who uncovers an earlier error or is required to make a change following an audit.
Or perhaps a business makes a strategic change to its accounting methods. In Monday’s blog article, we offered an example of how a business might select to transition from cash to accrual accounting in order to take advantage of the fact that the TCJA has changed the definition of a small business.
Form 3115 offers a series of advantages to businesses…
The biggest advantage with Form 3115 is that it eliminates the statute of limitations for claiming a refund. A business can conduct a cost segregation study many years into the life of an asset, even if that tax year is closed under the statute of limitations. For example, a client might acquire a depreciable asset in 2012 and use an incorrect depreciable recovery period for the next five years. In 2017, the business can file and correct the depreciation for the entire period.
Second, Form 3115 also eliminates interest on prior year deductions. Keep in mind, this could be due to either overstatements or understatements. If a business has to pay back the IRS because of the use of an incorrect method, it avoids paying the interest by filing Form 3115. Comparatively, waiting for the IRS to uncover an error leads to penalties and interest on prior-year tax returns.
Third, when a business experiences an increase in income (for instance, if a client transitions from cash accounting to accrual accounting because it has reached that definition of a large business), Form 3115 offers the 481(a) procedure so the taxpayer can divide that deduction over four years. This means, of course, that the hit (tax-wise) to the business is usually more amenable.
Learn more proactive tax planning strategies at the American Institute of Certified Tax Planners.