WEBINAR FAQs IS THE PAPER FILED COPY DUE BY DATE THE TAX RETURN IS TIMELY E-FILED OR WHEN THE TAX RETURN IS DUE (INCLUDING EXTENSIONS)?

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1 WEBINAR FAQs Filing Q1 IS THE PAPER FILED COPY DUE BY DATE THE TAX RETURN IS TIMELY E-FILED OR WHEN THE TAX RETURN IS DUE (INCLUDING EXTENSIONS)? Q33 What is the submission deadline of signed Form 3115 to Ogden? For ex., if 2014 P/S return is filed on 3-15, does the signed Ogden copy have to be mailed: a) on or before 3/15, tax return filing date, or b) on or before 4/15, default due date for P/S TR? Q158 What is the deadline for the filing 3115 to Ogden? The original completed Form 3115 must be attached to the taxpayer s timely filed tax return. The Ogden copy can be filed no earlier than the first day of the year of change and no later than the date the taxpayer files the original Form 3115 with their income tax return. Q45 If Form 3115 needs to be filed no later than the date the Federal Tax Return is filed, if the return was filed electronically on 3/1/15, is the due date for the 3115 to be sent to Ogden due 3/1/15 or 4/15/15 for individuals or partnerships? The due date for the Form 3115 to be sent to Ogden would be 3/1/15. See question 1. Q46 My understanding is that extension of the income tax returns extends the filing of Form 3115 copy with Ogden and covers ALL form 3115 packages for that tax year. Is this correct? No. The due date to file Form 3115 is specific to each taxpayer. See question 1. Q9 Assuming an eligible small business (under $10 Million 3 year average sales) has been following conventional capitalization and repair practices, is a Form 3115 still required? Should a Form 3115 be filed on a protective basis anyway? Q115 I don't understand why a Form 3115 must be filed if you are just now reporting in line with the new regs... If you have been capitalizing betterments in the past and expensing repairs, is a Form 3115 required? Spidell Publishing, Inc.

2 Q171 If all items are being depreciated and the only expenses taken would be consistent with the new rules do you need to file the 3115? Yes. Conventional capitalization and repair practices are not the same as following the specific rules contained in the new tangible property regulations. Therefore, applying the new tangible property regulations is considered a change in accounting method and Form 3115 is required. Filing the protective Form 3115 provides assurance that the client is in compliance with the new regulations. Q7 One of the things that was cleared up for me was that none of the safe harbor elections require Form So I remain confused as to exactly WHY the IRS would expect the vast majority of taxpayers to have Forms 3115 included on their tax returns (which I ve read elsewhere)! What if we have always accounted for materials and supplies in the way that is described by new regulations? I don t want to do 3115 for no reason! It is unlikely that a taxpayer was using a method of accounting that is described in the new regulations prior to the regulations be issued. See question 9. Q18 Does the Form 3115 attached to the tax return have to be signed? Or only the one filed in Ogden? Q34 Is the pdf attached to T/R a signed copy? Q35 Please clarify needs to be signed even with e-filed returns? Does preparer need to sign as well? Q36 Would you recommend having the client sign one copy, have it scanned for the PDF copy that is attached to the tax return, and then send the original wet signature version to Ogden? Q37 The instructions say the 3115 attached to the return does not have to be signed. Did I hear you say it did? Q40 Did I understand correctly that Form 3115 included in the e-file tax return needs to be signed? Spidell Publishing, Inc.

3 Q193 Can an unsigned 3115 be electronically filed or must it be a signed PDF copy attached to the efiled return? Q195 I think the speaker said that the copy of the Form 3115 that is to be filed with the income tax return must be signed and therefore should be attached as a pdf to an e-filed return or sent in as a hard copy with Form But page 3 of the Form 3115 instructions stated the following: The Form 3115 attached to the income tax return (including any additional statements) does not need to be signed. Please clarify whether or not the Form 3115 (filed with the income tax return) needs to be signed. Q205 Regarding the 3115 to be sent to Ogden, am I correct that I can't have my clients sign the form and or fax it back to me? Q206 That it has to be an original signature (i.e. a "wet" signature)? Form 3115 attached to the tax return does not require a signature of the taxpayer. This is true whether the Form 3115 is a paper copy attached to a paper filing of a tax return or a PDF attached to an e-filed tax return. For automatic change requests the paid preparer does not need to sign either. The Ogden copy will require a wet signature of the taxpayer only on automatic change requests. For joint individual income tax returns both spouses must sign the Ogden copy. For partnerships, a general partner (or LLC member) who has personal knowledge of the facts and is authorized to sign, should be listed in the signature block & Form See the instructions for Form 3115 for additional instructions on who must sign. Q38 How is the timeliness of submission to Ogden copy tracked? Is it the mailing date or the receipt date at the Ogden office? Timely filing of the Ogden copy of form 3115 will follow IRC 7502 timely mailed is timely filed. Also see question 18. Q39 Would you please review the procedure to file form I understand the signed copy to Ogden but how is the copy sent in with an e-file return? On an e-file tax return the Form 3115 can be attached as a PDF. See questions 18 & Spidell Publishing, Inc.

4 Q48 Regarding filing Form 3115, if you have already filed the return and it is prior to April 15, can you still file with Ogden and file an amended return with just the 3115 attached? Yes. An automatic extension of six months from the due date (excluding any extension) of the federal income tax return for the year of change requested on Form 3115 is granted to file a form 3115 under the automatic change procedures provided that the taxpayer: Q61 1. Timely filed its original federal income tax return for the year of change; 2. Files an amended return within the six-month extension period implementing the requested change in method of accounting for the year of change; 3. Attaches the original form 3115 to the amended return; 4. Files a signed copy of the original form 3115 with the IRS in Ogden no later than the date the original is filed with the amended return; and 5. Provides a signed copy of the original form 3115 to the examining agent, appeals officer, or counsel for the government, if applicable. Do we also have to attach Form 3115 to the state income tax returns? Q155 Do we need to file 3115s for CA as well as federal?? Yes. The instructions for California returns indicate that a copy of the Form 3115 should be attached to the California return for the first taxable year the change becomes effective. Q76 Do non-profits need to file Form 3115? Do individuals owning rental property reported on 1040 Sch E need to file Form 3115? Non-profits are not exempt from the accounting method change rules. Individuals who own rental properties and report the income and expenses on Schedule E need to apply the TPR s for repairs and maintenance expenses, materials and supplies expenses, and the new unit of property definitions. Therefore, they are required to file Form Q191 If as of 1/1/14 there is a building on the depreciation schedule and there have been no partial dispositions and no additions or improvements, is a DCN 196 or other 3115 required? DCN 196 would be used only if there was a late partial disposition election to be made. Form 3115 would be required to adopt the TPRs new definition of unit of property for the building. See question Spidell Publishing, Inc.

5 Q95 Could there be a situation -- on any return that has repairs, equipment, supplies, real property etc. -- where a Form 3115 would NOT be filed? Any tax return that has these types of expenses and/or tangible property will require Form 3115 to adopt the new regulations for the definitions and timing of deductions for repairs, materials and supplies, and unit of property. Q110 I would like you to confirm that these regulations apply to all taxpayers, including individuals and trusts/estates. Q176 Would a trust file a 3115? Correct. The regulations apply to all taxpayers: individuals, partnerships, corporations (C or S), trusts and estates, and exempt organizations. Q162 Do all owners of a tenant in common owned property need to file 3115s? Unless there is a common entity filing a tax return, each individual owner would be required to file their own Form 3115 for any change in accounting method. Q204 Am I correct that it is acceptable to mail the 3115 with Form 8453 instead of e-filing it with the return? Yes. For individual income tax returns, Form 3115 is one of the items specified as an attachment. Q210 If 2014 is a final year tax return for the business, does a Form 3115 have to be filed (since automatic approval is not allowed for final year returns)? Do any elections or adjustments have to be made? Or do we file the final return with no Form 3115 and make any necessary elections that are annual elections not requiring a Form Scope limitations (such as final year) do not apply to the automatic consent changes included in the TPRs. Form 3115 is still required if any of the TPRs apply to the taxpayer s business. Any elections are voluntary and not required. The impact of using the safe harbor elections on the character of the gain or loss (if any) resulting from the final year transactions should be assessed. A Form 3115 will be needed in order to change the accounting method of the taxpayer adopting the new definition of unit of property for the safe harbor elections Spidell Publishing, Inc.

6 Reduced filing requirements Q20 What do you believe is the minimum as far as elections and Form 3115's that need to be prepared for the small business owner (<$500k) or for taxpayers with 3 rentals or less? Q156 Residential Rental Activity - Small TP - Do you recommend a 3115 for code 184 (changing to units of property) for all rentals? Q157 Do home offices with depreciation require a Form 3115? Q147 For the many clients with one residential rental, is the 3115 required? Q102 Who do we have to do the 3115 for, what size? Can we exclude smaller clients? Home office with tangible assets? Q22 Is an employee with an office in the home where they depreciate a portion of it and also may have computer equipment (all being on a Form 2106 and related Form 4562) subject to these new regs? Q108 If we have an individual taxpayer that files a Sch E for having a residential rental house, and that taxpayer pays $1500 for a new porch - is a Form 3115 required? Q169 Non-rental trade or business - do you recommend filing a 3115 for code 184 (changing to definition of UoP) for all businesses? Q175 If a taxpayer has one rental unit, all property was correctly capitalized in the past. There are supplies. Should a 3115 be filed, if yes, for what? No dispositions. Q200 I have a question about Form 3115, regarding mandatory changes with prospective IRC 481 (1). If I understood correctly for peace of mind I should complete this form for all my clients with businesses who have depreciation schedules, including Schedule E in regards to rental properties? Spidell Publishing, Inc.

7 Q209 Finally, are clients with one residential rental property required to file Form 3115 and/or make the elections? Neither the regulations nor the related revenue procedures provide for any minimum amount of revenues or number of properties to exempt a taxpayer from making a change in accounting method and filing Form For nearly all of the automatic consent changes, taxpayers with average annual gross receipts of $10 million or less have a reduced filing requirement. Each of the examples in the text demonstrates how to complete Form 3115 with reduced filing requirements. For reduced filing requirements of any accounting method change, see Rev. Proc for the specific accounting method change. Q160 Do we need to file for 2106 assets? There are no exceptions to filing due to size or amount. See question 20. Q207 If my clients' tax returns are not impacted by any of the Rev Procs for 2014, do they still have to file 3115 or make the elections or can they wait until a subsequent year to file when they are impacted by the Rev Procs? If there is nothing in the TPRs that applies to activities or assets on your client s tax return, then no Form 3115 should be filed. For example, an individual filing Form 1040-EZ does not need to file Form However, if the taxpayer is a business entity, exempt organization, or individual with a Schedule C, E or F, they likely need to file a Form 3115 even if there is not IRC 481(a) adjustment for the current year. See question 20. Q21 Where on the Form 3115 do you designate a "qualifying taxpayer" to allow for a shortened Form 3115? There is no place on Form 3115 to indicate that the taxpayer is a qualifying taxpayer for purposes of the reduced filing requirements. Form 3115 Change Requests/Adjustments Q4 IS IT REQUIRED TO PUT ALL 3115 CHANGE REQUESTS ON ONE FORM? IF NOT ENOUGH ROOM ON ONE FORM, CAN TWO 3115 BE SUBMITTED? Q183 Do we complete one Form 3115 for an individual OR are there three separate Forms 3115 for each rental? Spidell Publishing, Inc.

8 A single Form 3115 should be filed for any of the automatic consent changes covered by tangible property regulations for the following items: repairs and maintenance, materials and supplies, capital expenditures, amounts paid to acquire or produce tangible property, and amounts paid to improve tangible property. See Rev. Proc Section A separate Form 3115 should be filed for any of the automatic consent changes covered by the MACRS property disposition rules (including partial dispositions). However, all automatic consent changes covered by the MACRS property disposition rules (including partial dispositions) should be included on a single Form See Rev. Proc Section 6.38(9). Q6 When you submit 3115s with 481a adjustments, do you have to include depreciation schedules if the change involves depreciation? Q143 Should 3115 include identification of each unit of property? No. If you have a change in accounting method that involves depreciation, you must complete schedule E on form However, in the case of certain changes under Rev. Proc , limited information is required to be completed on Schedule. See Rev. Proc , Section 6.41 for a summary of the changes which provides a chart listing the section in Rev. Proc that contains the details of the information required to be completed on Form Q29 Drake says separate 3115 required in order to e-file? Is that true? Q32 Can you still electronically file a return with multiple automatic consent changes on a Form 3115? I understood that you only can have one change per 3115 to electronically file. Q121 To clarify my earlier question - Drake says only one DCN per 3115 in order to e-file. What does the presenter know about that? Current IRS e-file does not allow multiple accounting method change numbers on a single Form If you prepare a form 3115 with multiple change numbers, you will need to attach the form 3115 as a PDF to the e-filed tax return. Q39 Would you please review the procedure to file form I understand the signed copy to Ogden but how is the copy sent in with an e-file return? On an e-file tax return the Form 3115 can be attached as a PDF. See questions 18 & Spidell Publishing, Inc.

9 Q31 Can you amend a form 3115 filed for 2014? Q148 Can you amend a form 3115 filed for 2014? There is no form 3115X. If a change is necessary on a previously filed form 3115, correspondence should be sent to the IRS in Ogden, Utah. If a taxpayer is under examination, before an Appeals office, or before a federal court, an additional copy of the correspondence should also be sent to the examining agent, appeals officer, and government counsel on the same date that the information is sent to Utah. See Rev. Proc , Section 6.03(e). Q173 If an asset should have been capitalized but it was expensed on the return, how far should we go back to correct? 2 years? For several IRC 481(a) adjustments, only amounts paid or incurred on or after January 1, 2014 are considered. Those items include: Materials and supplies De minimis safe harbor amounts Costs for acquisition of real property Inherently facilitative costs IRC section 263 A direct and indirect material costs There is no time limit on how far back you should review your books and records. A change in accounting method takes into account all differences from the inception of the entity/activity. For practical purposes, the limit on how far to go back will be dictated by the taxpayer s records. Q180 If we prepare a 3115 for DCN's 184,185,186,192 (protective) in 2014, but next year have a situation where DCN 205/206 would be beneficial, can we submit another 3115 for those changes in a 2015? Yes. Q23 If a repair expense was allowed in prior years by a tax court and under the new regulations it would be required to be capitalized, do we need a 481(a) adjustment on a 3115 for the difference? It depends. If the taxpayer has a change in accounting method that requires them to look back to all prior periods, then the change would be necessary. Many of the changes in accounting Spidell Publishing, Inc.

10 methods require taxpayers to look only at amounts paid or incurred on or after January 1, See question 49. Q49 Do we need to go back to 2012 for 3115 adjustments? Q134 Please address what must be done in 2014 for items deducted in prior years as repairs that should have been capitalized? This is a big issue. IRC 481(a) adjustments are required so that an item of income or expense is neither duplicated nor omitted from a taxpayer s income. For materials & supplies, and repairs & maintenance expenses, taxpayers will look only at costs paid or incurred on or after January 1, For MACRS property dispositions, the IRC 481(a) adjustments should include any assets placed in service in a taxable year ending on or after December 30, Taxpayers are permitted, but not required, to apply the MACRS disposition rules to assets placed in service in taxable years ending before December 30, See Treas. Regs (i)-8(j)(5). See Treas. Regs (i)- 1(m)(5) for general asset accounts. Late partial disposition elections can be made for any tax year beginning on or after January 1, 2012, and beginning before January 1, See Rev. Proc , Section Q83 If we claimed deductions for M&S and reported dispositions in accordance with the regs in effect at the time, do we have to file 3115 to adopt new provisions under new regs to apply new rules beg 1/1/14 & forward or is it deemed to be automatically adopted? Any change to comply with the TPR s is a change in accounting method. Form 3115 is required to be filed in order to adopt the new definitions of materials and supplies under Treas. Regs For materials and supplies expenses, the IRC 481(a) adjustment is determined by considering only those expenses paid or incurred on or after January 1, In the case of prior year dispositions of MACRS property, complete asset dispositions for assets not in mass asset accounts or subject to general asset account rules, are not impacted by the regulations. However, partial asset dispositions would require review for conformity with the new regulations. See question 49. Q28 Reg j "effective date" provides for early or optional application. Would this allow the taxpayer to calculate a 481 adjustment to take into income over 4 years rather than the unfavorable cut off method? There is no impact on the 481(a) adjustment period when a taxpayer has elected to early or optional application of the regulation. The 481(a) adjustment period is determined under Rev. Proc , Section For a net negative 481(a) adjustment, the 481(a) adjustment period Spidell Publishing, Inc.

11 is the year of change. For a net positive 481(a) adjustment, the 481(a) adjustment period is the year of change and the three succeeding years. Penalties/consequences for not filing Form 3115 Q8 What, if any, are penalties for preparer and/or taxpayer for not filing 3115 if required to do so? Q130 Do you have a sample client letter regarding the required filing for change in accounting method? Help me explain to my client why the form 3115 needs to be filed. What are the downsides of not filing and why? Q145 What is the consequence of not making any accounting method change(s) under the new regulations and following the old rules? New rules? Given the amount of uncertainty surrounding the application of the TPRs and the need to file Forms 3115, it is difficult to believe that the IRS would consider asserting penalties against a practitioner who does not believe that filing Form 3115 was necessary. However, there are penalties and sanctions that can be imposed for certain types of conduct. Circular 230 Section Diligence as to accuracy. (Paraphrased) A practitioner must exercise due diligence in preparing tax returns. Section Incompetence and disreputable conduct. (Paraphrased) A practitioner may be sanctioned for willfully assisting, counseling, or encouraging a client to violate any federal tax law. IRC 6694(a) & (b) Understatement of a taxpayer s liability by tax return preparer. Preparer penalties could be asserted if the failure to file Form 3115 with a positive 481(a) adjustment was due to an unreasonable position or due to willful or reckless conduct. Penalty amounts are the greater of $1,000 or 50% of the income derived (unreasonable position) and the greater of $5,000 or 50% of the income derived (willful or reckless conduct). Q77 What is the exposure if 3115 is missing a check box being checked, or incomplete? Does it get rejected? An incomplete Form 3115 may be returned by the IRS for proper completion or with a request for additional information. Q100 Will filing a Form 3115 without a 481(a) adjustment trigger an audit in your opinion? No. Many taxpayers will be filing a protective Form 3115 with no IRC 481(a) adjustment Spidell Publishing, Inc.

12 Q112 I still need the pros and cons to Filing Form 3115 to identify unit of property or building structure or building systems. Q130 Do you have a sample client letter regarding the required filing for change in accounting method? Help me explain to my client why the form 3115 needs to be filed. What are the downsides of not filing and why? Q145 What is the consequence of not making any accounting method change(s) under the new regulations and following the old rules? New rules? Pros: Cons: Q208 Compliance with the current tax regulations. Ability to use partial disposition election for buildings and other property. Ability to make proper determinations of which expenditures should be capitalized and which should be current deductions. Preparing tax returns using an impermissible method of accounting. Inability to claim losses on late partial asset disposition elections for TBOA 1/1/2015. See question 8. If by chance any of the returns "slip through the cracks" and Form 3115 or the elections are not made, what is the IRS recourse in terms of deductions for the clients' tax returns? For failure to file a Form 3115, the exposure for the client is the potential loss of deductions due to incorrect or impermissible accounting methods. Failure to make an election merely impacts the timing of tax deductions. Also see questions 8 & 112. Filing a protective claim Q106 Are you saying that we should file a protective 3115 for essentially *any* client with a building being depreciated? Yes Spidell Publishing, Inc.

13 Q107 Is there a summary of the most common accounting method changes that will need to be made for most taxpayers with real estate? i.e., the must do s? Every taxpayer will have to decide which changes are applicable to their returns. See the chart on pages 3-4 for the DCNs related to the TPRs. The sample Form 3115 for Fluffit Company beginning on page 70 covers changes in repairs, materials & supplies, unit of property, and capitalization of acquisition costs. Q211 Why didn't you include DCN 188 & DCN 193 in the protective 3115 filing? See question 107. DCN 188 (deducting nonincidental, rotable, and temporary spare parts when disposed of) & DCN 193 (change to deducting certain costs for investigating or pursuing the acquisition of real property) did not apply to the facts in this example. Q111 Which form 3115 is the protective election example? Form 3115 for Fluffit Company, beginning on page 70 of the text, would be considered a protective Form Q136 Q: I have a lot of real estate clients-- small buildings. When I file 3115 to elect DCN184 do I just follow the Fluffit company example only for the 184 item also for an example I use to depreciate carpets so some of them are still on the depreciation schedule? Q137 Can I just take a 481 for the rest of the depreciation and then just use 184 as a code on the 3115?? The protective Form 3115 with DCN 184 covers repairs and maintenance expenses, improvements to tangible property, and changes to units of property. If these are the only items for which you believe changes are necessary, you could follow the Fluffit example for DCN 184. With regard to the carpets, if there is remaining basis and the cost should have been property categorized as an expense, a 481(a) adjustment would include the basis remaining as of the last tax year. Q172 Do you recommend filing an 'all-inclusive' protective 3115 for all codes for all TP who own property? Q175 If a taxpayer has one rental unit, all property was correctly capitalized in the past. There are supplies. Should a 3115 be filed, if yes, for what? No dispositions Spidell Publishing, Inc.

14 If filing a protective Form 3115, only those DCNs that apply to the taxpayer should be included. For example, it would be inappropriate to indicate all DCNs as the taxpayer does not use the a regulatory accounting method (DCN 185). Q194 It is clear that the speaker recommended a "protective" position for owners of buildings (and/or any other assets realistically comprised of multiple "units of property" or systems), and essentially thought everybody should file a protective 3115 to "opt in" to the new rules. Our client base includes a number of taxpayers depreciating real property, whether for rental, business, or farm purposes, or even a home office. Even with the abbreviated procedures outlined, it seems onerous to file 3115s for literally all of these. So our question, primarily, is - Should we really expect to do so in *all* cases? I wonder if, perhaps, there might be some circumstances in which the speaker might agree filing is un-necessary. For instance: o Should we file a 3115 for somebody who placed property into service in 2013, and, thus, has not set an "accounting method" prior to 2014? Yes. While a method of accounting has not been adopted until it is used in two successive periods, there is still the issue of determining the appropriate unit of property going forward. o Should we file a 3115 for somebody who sells property in 2014? What about an impending sale in 2015 where it is known no additional improvements are being added to the property? Possibly. If the property were sold on January 1, 2014 there could be no expenditures that would be improperly categorized as current year expenses vs. capital expenditures. For a property sold at any date after January 1, 2014, then the taxpayer should adopt the TPRs. o Should we file for a property that has never had any improvements reported, only repairs and maintenance which we are comfortable in assuming would not have been treated incorrectly given the new rules? See question 5. o Should we file for fully depreciated property? How about *mostly* depreciated? See question 47. o For a home office, on which depreciation deductions are typically much less valuable, must filing still occur? See questions 20, 52, & 157. o If a taxpayer was not going to want to pursue a "partial disposition" deduction on a property in the future, is this still as important? See questions 5 & 98. o What is the realistic downside risk for not filing in a case where the taxpayer is confident that prior improvements have been treated correctly, and does not want to pursue partial disposition deductions? See questions 8 & 112. o Is the filing just to avoid an exam, or do you think IRS would disallow depreciation for partial dispositions that we failed to account for? This seems unlikely, as it sounded like (in most cases) the partial disposition is elective and not required. Filing Form 3115 is required to be in compliance with the current tax law. It is possible that the IRS could disallow inappropriate repair expenses. It would be a violation of Circular 230 Section to provide Spidell Publishing, Inc.

15 advice to a client based on the possibility that a tax return will be audited or that an issue will not be raised on audit. o If there was to be further IRS guidance (as you intimated), how long should we wait for it? Would you recommend extensions? The IRS has yet to provide any formal indication that there will be future guidance. Practitioners will have to decide which, if any, of their clients file extensions with a wait and see approach, hoping for more guidance (or relief). Q96 For our small clients, is it better to file a Form 3115 and check the boxes but not make an adjustment because it is so immaterial? What should the wording be for these clients? Q99 My taxpayers are very small. Is it better to file a Form 3115 if they depreciate assets and check the boxes, but not compute a 481a adjustment due to the small amount? What wording would you use for this? There is no materiality threshold provided in the regulations to adopt the new accounting methods. See the last example in the text for Fluffit Company for a protective From 3115 sample. Q186 Is it necessary to disclose $ values of separate units of property on the protective 3115? No. Partial Asset Dispositions Q2 IN THE HANDOUT MATERIALS, AN EXAMPLE OF 3115 IS GIVEN FOR PARTIAL ASSET DISPOSITIONS UNDER CHANGE NO. 205, 206. IF NO HISTORICAL PARTIAL DISPOSITIONS OCCURRED, IS IT STILL IMPORTANT TO FILE 3115 IN 2014 TO BE ABLE TO CLAIM DEDUCTIONS IN A FUTURE PARTIAL DISPOSITION? Yes. Form 3115 should be filed for 2014 to adopt the new unit of property definitions using designated change number 184. Q84 Do we need 3115 for partial disposition election? Q159 Can you explain the situation when you would need to file a Form 3115 for a partial disposition and when you could just make an election on a tax return? Spidell Publishing, Inc.

16 Q93 Form 3115 is not required for partial dispositions in the current year, only if you are taking a partial disposition for assets capitalized in prior years. Q94 On the Partial Disposition Election - Form Does the 3115 get filed the first time there is one of these assets. So if a roof is replaced in 2017, I'd file the 3115 in 2017? The partial disposition election does not require a change in accounting method. However, adopting the new regulations unit of property definition does require a change in accounting method. Before you can make a partial disposition election you must file Form 3115 to adopt the new definition of a unit of property with designated change number 184. Q92 Slide 15 page 20 if you are writing off old in same asset class sounds like you do not have to use 3115? The partial disposition election for assets in classes requires that the replacement asset also be in the same class. See question 84. Q97 Do we have to do anything in this year s filing to have this partial disposition available for I was told that in 2015 a partial disposition will cost money for a private letter ruling is that true? See question 84. Adoption of the method of accounting that provides for the new definition of unit of property is an automatic consent change. This is true whether the Form 3115 is filed in 2014 or in a later year. There is no cost to apply for a change in accounting method for automatic consent changes. Q87 In the sink ex on page 20, why is the taxpayer able to deduct the 1k as repair absent a partial disposition election? When the taxpayer does not make a partial asset disposition election they must determine whether the cost of the new sink is an improvement. A sink would be part of the plumbing system. Replacing one sink in a 25 apartment building would not be an improvement to the plumbing system, and therefore would be a current repair expense. Q88 Partial asset dispositions and form 3115: In the Launderland example you are only filing a 3115 because you are making a late election right? In other words, we don t need to file a 3115 now to preserve the potential benefits of a future partial disposition? Spidell Publishing, Inc.

17 Q159 Can you explain the situation when you would need to file a Form 3115 for a partial disposition and when you could just make an election on a tax return? The Launderland example includes partial dispositions that were the result of a casualty (earthquake and fire). When a disposition occurs as the result of a casualty, the partial disposition rules are mandatory. Form 3115 is necessary to adopt the method of identifying the unit of property, without which a partial disposition calculation could not be made. See question 84. Q91 Q: Can you use partial disposition election on abandoned lease imp's if you moved out in 2011? Abandonment of leasehold improvements at the end of the lease would be a complete disposition of an asset. The remaining basis in the leasehold improvements would either be rent expense or a 1231 loss. Q122 Taxpayer is audited and loses the deduction of a repair can we do a partial disposition on a 3115 at that time. Will there be a charge by the IRS for this private ruling? A partial disposition election can be made when the IRS disallows a repair deduction. The change in accounting method is an automatic change. Designated change number 198. There is no charge for making an automatic change. Q126 If a taxpayer has rental property and they did not dispose of a prior disposition, so they have stranded basis. If they do not care about taking the loss, can they just keep depreciating both, and not bother with the filing of Form 3115, nor any election? Partial disposition elections are not required to be made for tax years beginning before January 1, However, if the disposition was due to a casualty; gain deferral under IRC 1031 or 1033; transfer in a step-in-the-shoes transaction described in IRC 168(i)(7)(B); or the sale of a portion of the asset, then partial disposition rules are mandatory. See question 49. Q181 On page 5 of the material, there is an election chart that shows a partial disposition election (non-general Asset Account (non-gaa) property) in the election description and shows that the election is made by doing it on a timely filed original return. It goes on to state on page 19 of the material that a taxpayer must recognize gain or loss on the item disposed and must capitalize the cost of replacing the asset. No election is required. It goes on to say that Treas. Regs (i)-(8) allows taxpayers to elect to claim a gain/loss on the partial disposition of an asset held in a single-asset account or multiple-asset account, without having identified the component as an asset before the disposition event. However, on page 21 of the material it Spidell Publishing, Inc.

18 talks about accounting method changes outlined in Rev. Procs and that require a Form 3115 and it shows Dispositions of a building or structural component, gain or loss recognized (change 205). How are these different? Is the change outlined in Rev. Proc and only related to GAAs and only for elections that were originally made in the temporary regulations? Please elaborate. The partial disposition election is not required. Calculating gain or loss is mandatory in a partial disposition involving a casualty, gain deferral under 1031 or 1033, transfer in a step-inthe-shoes transaction, or sale of a portion of an asset. The accounting method changes on page 21 (DCNs 205 & 206) relate to mandatory partial dispositions. DCN 196 is for late partial disposition elections. Q101 For buildings, how do you determine the amount for each of the systems? Is cost segregation study mandatory? Cost segregation studies are not mandatory. Rules for determining the basis of an asset disposed of in a partial disposition are in Treas. Regs (i)-8(f). These regulations indicate that taxpayers may use any reasonable method for determining basis. Examples given in the regulations include discounting the cost of the replacement asset by the Producer Price Index for Finished Goods or the Producer Price Index for Final Demand, using a pro rata allocation of the unadjusted depreciable basis of the asset replaced, or using a cost allocation study. Q192 If the roof is replaced on this building in 2015 and a DCN was not filed in 2014, can the taxpayer elect a partial disposition for the roof portion of the building in 2015? If the partial disposition occurs in 2015, then the election would be made on the 2015 tax return. It would not be necessary to include DCN 196 on a Form 3115 to be able to use the partial disposition election in future years. A Form 3115 is required only for late partial disposition elections or partial dispositions that were mandatory and occurred in previous years. Units of Property Q5 Clients with rental properties: Are the new changes to the way the IRS looks at a building / UOP a mandatory change in an ongoing rental so that there is a required Form 3115 on that issue? I m confused about that! Q144 If your clients have claimed all section 179 depreciation on assets or bonus depreciation and have no depreciation carrying forward would you still file 3115? Spidell Publishing, Inc.

19 Yes. Teas. Regs (a)-3(e)(2) provides the definition of a unit of property for a building structure and building systems. Form 3115 is required to adopt the new definition of a unit of property as it applies to buildings. Q16 LLC has a commercial rental on its books that was acquired a number of years ago. The building is being depreciated over 39 years, no additions or deletions during It appears no 3115 is needed. Is that correct? No. Form 3115 is still required. See question 5. Q12 New depreciation lives for building systems? The concept of considering a building system as a unit of property does not create a new asset with a different class life or recovery period. Q13 What happens when daycare and have business use of home? In the case of a daycare business operated in a residence, the new regulations will look at the real property in terms of the building structure and each building system. There is no differentiation between a building used in a daycare business versus a building used in any other type of business. Q52 Does a home office fall under section 1.263(a)-3(h) Yes. A home office would be considered a building under Treas. Regs (a)-3(e)(2). Q89 Is there a list of components for real estate and equipment? The unit of property definitions for a building and for building systems are in Treas. Regs (a)-3(e)(2). Q98 When a taxpayer buys a new building do we set up depreciation for the building and then each of the systems? Q125 Do we need to restate depreciation schedules? To show breakouts of assets into Units of Property? Spidell Publishing, Inc.

20 Q105 For a residential rental property (something as simple as a single family home), which was purchased years ago with an HVAC system, is there a need to separate out the building systems and to file the 3115? How would you figure out the value to separate? Q103 Since taxpayers now need to divide property into separate units and building into the new 9 building systems, what are the acceptable methods of accomplishing this? Is a Cost Segregation Study necessary? Q167 For the Units of Property, building structure and the building systems. Do they have different lives? Q182 Basically, we want to find out if we have a building on the depreciation schedule, and we haven t disposed of any of the components in 2014, do we have to file a Form 3115 to break out the original building into separate components for the possible future sale of a component, e.g., the roof, or HVAC system? Q189 You listed the 9 building systems that make up the unit of property for buildings. If a taxpayer placed a building in service prior to 2014 as one 39 year unit of property and did not segregate it into the 9 different building systems, are they required by the regulations to have the building segregated into the 9 building systems on their 2014 tax return or at any point in the future? What are the acceptable methods for segregating it even if it is not required (is a Cost Segregation Study the only way)? No. The definitions of a building and of building systems as separate units of property are used to determine whether or not costs should be capitalized or currently deducted. Absent a cost segregation study, a new building will be set up on a depreciation schedule as a single asset (separate from its land cost). Q190 You stated that for plant property the unit of property is a component that performs a discrete and major function. If a taxpayer had plant property placed in service prior to 2014 that was not properly segregated by each unit of property as described in the regulations, are they required by the regulations to have the plant property segregated into proper units of property on their 2014 tax return or at any point in the future? What are the acceptable methods for segregating it even if it is not required (is a Cost Segregation Study the only way)? See question 98. Similar to a building and building systems, the unit of property determination will be used to determine whether an expenditure is an improvement to the asset. The new Spidell Publishing, Inc.

21 definitions of plant property do not require that plant property be broken into separate components that perform discrete and major functions for depreciation purposes. Q202 Do we have to break out the UOP on the Form 3115 or the tax return or can we just make the protective election and then break out later if there is a betterment etc. For instance, I have lots of rental real estate clients. Can I just leave the building asset as it is for now or do I have to break out into all the building systems etc. on the return? You are not required to identify the specific assets on the Form 3115, just the adoption of the new method of accounting. Also see question 98. Q119 If an S corp owns a building, & replaces HVAC for $7K. Can that be S179'd? Can that be expensed as "routine maintenance"? The determination of whether the HVAC unit replaced was an improvement would depend upon the overall size of the HVAC system considered as the unit of property. An HVAC unit is generally depreciated over the life of the building (27.5 years or 39 years). IRC 179 is not available for air conditioning or heating units. The routine maintenance safe harbor would only apply if it is expected that the HVAC unit would need to be replaced more than once every 10 years. Q124 If the sewage line of plumbing needs replacement, can I look at the entire plumbing of the building as a Unit of Property and in that respect the sewage line is not significant? So we could expense that as a repair? Plumbing systems would include a sewage line. The entire plumbing system is the appropriate unit of property to consider when determining whether the replacement of a single component should be capitalized. Replacement of a sewage line with a comparable sewage line would be considered a repair expense. Q153 How does breaking a building into components help us objectively decide capitalize vs. repair? Determining whether an expenditure should be capitalized as an improvement under the TPR s requires that the expenditure be analyzed with respect to the building structure and to the separate building systems rather than the entire building as a single unit of property. Q184 Can DCN 184 (change to units of property) and DCN 197 (revoke GAA election) be on the same Form 3115? The DCNs are mentioned on two different revenue procedures, so I think they should be on two Forms Spidell Publishing, Inc.

22 DCN 197 cannot be combined with DCN 184 on the same Form Most changes under the TPR s are covered under Rev. Proc Section and can be combined on a single Form DCN 197 (Revocation of a GAA election) can only be combined with changes under Rev. Proc Section 6.01 (Impermissible to permissible method of accounting for depreciation or amortization). Safe harbor elections Q11 Only do safe harbor elections when have additions? Using the safe harbor for small taxpayers and the safe harbor for routine maintenance are decisions made on an annual basis. Both of these safe harbors allow taxpayers that would otherwise have expenditures which require capitalization to take a current year deduction. Q15 Should a small service business with repair expenses on its books, attach a de minimis safe harbor election to its return? Yes. Assuming that the business (1) has an appropriate accounting procedure in place at the start of the year, (2) treats amounts paid for property in its books in accordance with their accounting procedure, and (3) applies the appropriate $500 or $5000 threshold, then the de minimis safe harbor election is generally beneficial. Q17 If a commercial building has an unadjusted basis in excess of $1million, do any special new rules apply? If the unadjusted basis of the building is in excess of $1 million the taxpayer will not be able to use the routine maintenance safe harbor for that building. Additionally, see question 5. Q44 De minimis safe harbor - does that mean it's not available for computers? (Useful life > 12 months) No. The de minimis safe harbor requires that the taxpayer have an accounting policy that treats as an expense for nontax purposes (1) amounts paid for property costing less than a specified dollar amount; or (2) amounts paid for property with an economic useful life of 12 months or less. As long as the property (a computer in this question) has a cost of less than the specified dollar amount, then it will be eligible for expensing under the de minimis safe harbor. Q51 Does a portion of building for the safe harbor include a fractional interest ownership? Spidell Publishing, Inc.

23 Q178 Re: tenancy in common, does the unadjusted basis for a given taxpayer include only his % of the property. For condominiums and co-ops, only the portion of the building that is owned by the owner of the individual condominium or co-op needs to be considered. For other fractional ownership (such as an IRC 761 election), the safe harbor for small taxpayers with buildings in the safe harbor for routine maintenance would be applied at the entity level. Q53 If the taxpayer's capitalization policy for de minimis expensing is set at $1000, will the IRS still allow the $500 level to apply? The client believes the $1000 amount more accurately reflects income. Q188 If a taxpayer without an AFS would like to use a capitalization policy for tax purposes greater than the $500 safe harbor amount are there any conditions on which they may do so? I have heard from other sources that if the taxpayer has a "valid business purpose" for using a different amount, they could do so. If this is the case, can you describe what these valid business purposes are? Yes. The de minimis safe harbor election will allow the taxpayer to deduct amounts paid for property of up to $500. This is true even if the taxpayer s accounting policy specifies an amount greater than $500. For a taxpayer whose policy is to expense amounts paid for property up to $1,000; the de minimis safe harbor election will not apply to expenditures of $501 - $1,000. Q56 To clarify, if we have 5 rentals, can we just say the small Bldg election applies 'to all rental properties', or do we have to list each bldg by address specifically? The safe harbor election for small taxpayers requires that the statement attached to the return include a description of each eligible building property. Indicating all rental properties would appear to be inadequate. Most tax preparation software allows the user to enter a description of the property. A taxpayer with five rental properties should enter a separate description for each of the rental properties. Q58 Page 11 Rents - how does that affect basis? If a taxpayer is the lessee of a building, in order to determine whether the building is a qualified building for purposes of the safe harbor for small taxpayers, total rents to be paid over the lease term are used rather than the unadjusted basis of the building Spidell Publishing, Inc.

24 Q59 So if taxpayer owns a building & repairs the building, do I have to attach the election? Which election? or do I simply input the amount in the repairs line of Sch E? Q154 For the safe harbor routine maintenance, is it correct that using this safe harbor does not require either and election or a form 3115? For taxpayers using the safe harbor for small taxpayers with buildings, all expenses that qualify for the safe harbor should be claimed as repairs expense. An election statement must be attached to the tax return for any year in which the election is made. For taxpayers using the routine maintenance safe harbor, all expenses that qualify for the safe harbor should be claimed as repairs expense. No election statement is required to be attached to the tax return for the routine maintenance safe harbor. Q60 Does the small building safe harbor also cover building components/fixtures? (i.e., a new furnace, new security system)? Yes. The safe harbor for small taxpayers with buildings covers expenditures for repairs, maintenance, improvements, and similar activities performed on eligible building property. Treas. Regs (a)-3(h)(1). Q62 For the repair safe harbor 10,000 or 10% does repairs include maintenance such as janitorial ad cleaning? Q78 What is included in repairs per building are we talking gardener, pool, ext., etc.? The regulations are silent as to what expenditures are properly classified as repairs or maintenance. Because general janitorial and cleaning expenses would rarely (if ever) be capitalized, it would be appropriate to exclude those costs from repairs and maintenance in the calculation of the $10,000 or 10% limitation. Q63 If I simply have repairs, do the regs apply at all? Or is this allowing depreciation of capital costs? A taxpayer who incurs costs must make the determination of whether to capitalize those costs as improvements (or nonincidental materials and supplies) or claim a deduction as a repair using the rules of the new regulations Spidell Publishing, Inc.