According to a recent article in the Journal Of Accountancy – due to new regulations effective for tax years beginning on or after January 1, 2014 – every business that owns tangible property will be required to file at least one IRS Form 3115 for the federal tax return.

What does this have to do with a cost segregation study? 

A cost segregation study is the process of identifying expenditures that restore property to its operating state. If you have constructed, purchased, expanded or remodeled commercial real estate, you almost certainly qualify for a depreciation opportunity for your income taxes. And, there are a large number of new items that may not have previously been depreciated by a taxpayer that are now prime candidates to include on IRS Form 3115, such as: 

• Home improvements like a new furnace, roof, remodeling projects, room additions, fixtures, etc.
• Land improvements including fences, driveways, landscaping, etc.
• Personal property such as computers, printers, desks, tables, chairs, file cabinets, furniture and appliances
• Property that was owned by the taxpayer before the business began and then used in the business
• Property such as pole barns, water-pump houses, etc., for farmers 

During the year in which a tangible property is placed in service, an accounting method is adopted relative to the depreciation method, recovery period or convention for the depreciable property. If a taxpayer has depreciated an existing building in prior years, then a request must be made to the IRS to change the method of accounting that had been used for the building. 

IRS Form 3115 is required by the IRS to change a taxpayer’s method of accounting. 

If specific filing rules are followed properly, the IRS automatically consents to the accounting method change. The form(s) must be submitted when any change in the accounting method has been made, including the following situations: 

• Switching from a cash basis method to an accrual basis method
• Switching from an accrual basis method to a cash basis method
• Changing the method or basis used to value inventory
• Changing a depreciation or amortization method 

The IRS claims that 60 hours of work are required to properly file Form 3115. That’s because this form is extraordinarily complex; it requires an in-depth set of schedules and attachments with specific details to explain the proposed changes to an accounting method. 

While proper filing of IRS Form 3115 is critical to cost segregation deprecation opportunities, businesses tend to back away because the process is so complex. However, that’s leaving money on the table, pure and simple. 

That’s why partnering with an outsourced tax expert is highly recommended. With the right guidance of an expert in cost segregation, the process is streamlined and vetted. The burden is taken off of your shoulders, while the result is optimal tax savings. 

Ready to learn more about how IRS Form 3115 applies to your cost segregation business activities? Download your complimentary, educational guide.