What Is Rev. Proc. 2015-14 and How Do I Use It?

Revenue Procedure 2015-14 is an Internal Revenue Service (IRS) document that provided a simplified process for small businesses to change their method of accounting. This procedure helps taxpayers comply with the tangible property regulations, also known as the “repair regs,” which clarify whether business expenditures on property should be deducted as repairs or capitalized and depreciated over time. While Rev. Proc. 2015-14 introduced this change, the general rules for automatic changes are in Rev. Proc. 2015-13, and the specific list of qualifying changes is now in Rev. Proc. 2024-23. This framework reduces the administrative burden that accompanies a change in accounting method.

Eligibility for the Simplified Procedure

To qualify as a “small business” for these simplified tangible property regulation changes, a taxpayer must meet one of two financial tests. This designation is based on financial metrics, not the number of employees.

The first test is a gross receipts test. A business qualifies if its average annual gross receipts for the three preceding tax years are $10 million or less. For example, if a business had gross receipts of $8 million, $9 million, and $10 million over the last three years, its average would be $9 million, making it eligible.

The second path is an asset test. A business meets this if it has total assets of $10 million or less on the last day of the tax year of the change. The asset value is determined by the taxpayer’s books and records using the accounting method for federal tax purposes.

Required Information and Calculations

Before filing for a change in accounting method, a taxpayer must calculate a Section 481(a) adjustment. This adjustment represents the cumulative financial impact of switching from an old accounting method to a new one. It is calculated as of the first day of the tax year of the change and prevents the duplication or omission of income or deductions.

The calculation involves identifying items treated differently under the old and new methods. For instance, a business may have capitalized an expenditure that should have been expensed as a repair. If a $20,000 expenditure was incorrectly capitalized and $5,000 of depreciation was taken, the business would calculate the remaining basis of $15,000.

This calculation results in either a positive or a negative Section 481(a) adjustment. A negative adjustment decreases taxable income and arises when past capitalization is changed to a current-year expense. A positive adjustment increases taxable income, which might happen if an item previously expensed is now required to be capitalized.

The reporting rules for the adjustment differ. A negative Section 481(a) adjustment is fully deductible in the year of the change. In contrast, a positive adjustment must be spread out over four tax years, beginning with the year of the change, to mitigate the immediate tax impact.

Completing and Filing Form 3115

The accounting method change is requested by filing Form 3115, Application for Change in Accounting Method. The previously calculated Section 481(a) adjustment must be reported on this form, which notifies the IRS that the taxpayer is altering its accounting practices.

The filing process involves two steps. First, attach an unsigned copy of the completed Form 3115 to the timely filed federal income tax return for the year of the change. Second, a separate, signed original of Form 3115 must be mailed to the IRS in Ogden, UT, no later than the date the annual tax return is filed.

Using the automatic change procedure grants “automatic consent.” This means the taxpayer does not have to wait for an approval letter from the IRS or pay a user fee before implementing the new method. Taxpayers must follow the standard automatic change procedures, which includes filing Form 3115.