IRS Issues Procedures for Accounting Method Changes on Tangible Property Dispositions. (Parker Tax Publishing March 13, 2014)

A new revenue procedure modifies the rules for obtaining automatic IRS consent to: (1) change a method of accounting for dispositions of tangible depreciable property, (2) change a method of accounting for depreciation of MACRS property; and (3) change a method of accounting for the treatment of general assets accounts. Rev. Proc. 2014-17.

Last September, the IRS issued final regulations under Reg. Sec. 1.167(a)-4, which provides rules for depreciating or amortizing leasehold improvements, and Reg. Sec. 1.168(i)-7, which provides rules for accounting for property depreciated under MACRS. The final regulations replaced temporary regulations issued in December 2012.The final regulations generally apply to tax years beginning on or after January 1, 2014, but also permit taxpayers to apply these provisions to tax years beginning on or after January 1, 2012. Alternatively, the final regulations also allow a taxpayer to apply the temporary regulations under Reg. Sec. 1.167(a)-4T and Reg. Sec. 1.168(i)-7T to tax years beginning on or after January 1, 2012, and before January 1, 2014.

Also last September, the IRS reissued proposed regulations relating to the dispositions of tangible property and the tax treatment of general asset accounts (GAAs). Specifically, the IRS issued (1) Prop. Reg. Sec. 1.168(i)-1, which will modify the rules for GAAs; (2) Prop. Reg. Sec. 1.168(i)-7, which will address the accounting rules for depreciation of MACRS property; and (3) Prop. Reg. Sec. 1.168(i)-8, which will provide rules for dispositions of MACRS property. The proposed regulations, when finalized, will apply to tax years beginning on or after January 1, 2014, and will permit a taxpayer to choose to rely on them for tax years beginning on or after January 1, 2012, and before January 1, 2014. Alternatively, the proposed regulations, when finalized, will permit a taxpayer to apply the temporary regulations under Reg. Sec. 1.168(i)-1T, Reg. Sec. 1.168(i)-7T, and Reg. Sec. 1.168(i)-8T to tax years beginning on or after January 1, 2012, and before January 1, 2014.

Previously, the IRS issued Rev. Proc. 2012-20, which provided the procedures for taxpayers to obtain automatic IRS consent to change to methods of accounting provided for in Reg. Secs. 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and Reg. Sec. 1.168(i)-8T.

The IRS has now issued Rev. Proc. 2014-17, which supersedes Rev. Proc. 2012-20 and provides the procedures by which a taxpayer may obtain the automatic IRS consent to change to the methods of accounting provided in Reg. Secs. 1.167(a)-4, 1.168(i)-7, 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, 1.168(i)-8T, and Prop. Reg. Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8. Rev. Proc. 2014-17 also modifies Rev. Proc. 2011-14, the general procedure for obtaining IRS consent to change accounting methods.

OBSERVATION: The IRS had previously issued Rev. Proc. 2014-16, which modified Rev. Proc. 2011-14 and provides guidance on automatic method changes relating to many of the final capitalization rules issued last September. The IRS has said that once the final disposition regulations are issued, another revenue procedure will be issued addressing the accounting method changes relevant to those regulations.

One of the more significant features of Rev. Proc. 2014-17 are the provisions in Section 6.29 and 6.33, which allow a taxpayer to recognize gain or loss on buildings, structural components, and other property previously disposed of that the taxpayer is continuing to depreciate. However, taxpayers have only a limited time in which to make this change. This change in method of accounting is only available for a tax year beginning on or after January 1, 2012, and beginning before January 1, 2014. In addition, certain scope limitations, which generally act to prevent a taxpayer from taking advantage of automatic consents to change a method of accounting, do not apply to a taxpayer that makes this change. Thus, these provisions will be mostly beneficial to taxpayers filing 2013 tax returns.

Another important provision of Rev. Proc. 2014-17 is Section 6.34, which allows the revocation of a general asset account election under Reg. Sec. 1.168(i)-1T or Prop. Reg. Sec. 1.168(i)-1 to be treated as a change in method of accounting for a limited period of time. This change in method is available for a limited time and may only be made for a tax year beginning on or after January 1, 2012, and beginning before January 1, 2015.

Example: Z, a calendar year taxpayer, acquired and placed in service a building and its structural components in 2000. Z depreciates this building and its structural components under MACRS. The roof is a structural component of the building. Z replaced the entire roof in 2010. On its 2010 federal tax return, Z did not recognize a loss on the retirement of the original roof and continued to depreciate the original roof. Z also capitalized the cost of the replacement roof and has been depreciating this roof under MACRS since June 2010. Z filed with its 2012 federal tax return, a Form 3115 to: (1) make a late general asset account election to include the building (including its structural components) placed in service in 2000 in one general asset account and the replacement roof in a separate general asset account; and (2) make a late qualifying disposition election for the retirement of the original roof in 2010. As a result, Z removed the original roof from the general asset account and reported a net negative Code Sec. 481(a) adjustment on the Form 3115 of $10,000, which is the loss recognized upon the retirement of the original roof. Z decides to apply Prop. Reg. Sec. 1.168(i)-1 and Prop. Reg. Sec. 1.168(i)-8 for its tax year ending December 31, 2013.

Z files a Form 3115 with its 2013 tax return to revoke the general asset account election for the building (including its structural components) placed in service in 2000 and for the replacement roof, and to change to treating the building (including its original roof and other original structural components) placed in service in 2000 as an asset and the replacement roof as a separate asset for disposition purposes. Assume the depreciation for the original roof is $500 for the 2012 tax year. The net positive Sec. 481(a) adjustment for this change is $9,500 (loss of $10,000 claimed on the 2012 return for the retirement of the original roof less depreciation of $500 for the original roof for 2012) and is included in Z's taxable income for 2013.

Forms 3115, Application for Change in Accounting Method, filed under Rev. Proc. 2014-17 must be filed with the IRS office in Ogden, Utah.

For a discussion of the rules relating to dispositions of MACRS property, see Parker Tax ¶94,327. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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