IRS Makes Significant Revisions to Automatic Accounting Method Change Procedure

(Parker Tax Publishing February 2022)

The IRS issued a 454-page revenue procedure that updates and supersedes many automatic tax accounting method changes in the Rev. Proc. 2019-43 List of Automatic Changes. The new procedure addresses changes relating to uniform capitalization methods in Code Sec. 263A, changes to sections dealing with a change in an overall accounting method from the cash method to an accrual method; changes in methods relating to Code Sec. 263A, certain late depreciation method elections or revocations; changes in accounting methods for qualified improvement property placed in service after December 31, 2017; changes in the timing of income recognition under Code Sec. 451(b) and Code Sec. 451(c); changes in accounting for the costs of computer software; and changes to the overall cash method or to a method of accounting in which a small business taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method for computing all other items of income and expense. Rev. Proc. 2022-14.

Background

Taxpayers are required to use a consistent method of accounting in calculating taxable income. Generally, a taxpayer can choose any permitted accounting method when the taxpayer files its first tax return. No IRS approval is needed to choose the initial accounting method. However, under Code Sec. 446(e), once a taxpayer decides on a particular accounting method and files the first tax return, the taxpayer is generally required to obtain IRS approval before changing that method. Such approval is granted for the tax year for which the taxpayer requests a change (i.e., the year of change), if the taxpayer complies with the provisions of the automatic change procedures. No user fee is required for an application filed under an automatic change procedure.

A change in accounting method includes a change not only in the taxpayer's overall system of accounting but also in the treatment of any material item. A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Although an accounting method can exist without treating an item consistently, an accounting method is not established for that item, in most cases, unless the item is treated consistently.

In general, a taxpayer must file Form 3115, Application for Change in Accounting Method, with the IRS to request a change in either an overall accounting method or the accounting treatment of any item. However, there are many instances where a taxpayer can obtain automatic consent from the IRS to change to certain accounting methods. In other instances, the taxpayer files the Form 3115 using the non-automatic change request procedures.

Periodically, the IRS updates the automatic IRS accounting method changes available to taxpayers to encompass developments that have occurred since the last comprehensive list of automatic changes was issued. The current comprehensive automatic accounting method change procedure is Rev. Proc. 2019-43. On February 2, the IRS issued Rev. Proc. 2022-14 which makes comprehensive changes and updates to the sections in Rev. Proc. 2019-43.

Significant Changes

In Rev. Proc. 2022-14, significant changes have been made to the following sections in Rev. Proc. 2019-43:

(1) Section 20.01, relating to a taxpayer changing its timing of incurring liabilities for employee compensation, is modified to add new paragraph which allows a taxpayer using an overall accrual method of accounting to change its method of accounting for taking into account certain employee commission liabilities;

(2) Section 6.01, relating to impermissible to permissible depreciation method changes;

(3) Section 6.18, relating to late elections or revocation of elections under Code Sec. 168(k)(5), (7), and (10), is modified to clarify that the waiver of the eligibility rules in Rev. Proc. 2015-13 applies for the taxpayer's first, second, or third tax year succeeding the taxpayer's tax year beginning in 2016 or 2017 and ending on or after September 28, 2017;

(4) Section 6.19, relating to changes for qualified improvement property placed in service after December 31, 2017;

(5) Section 6.20, relating to certain late elections or revocations of elections under Code Sec. 168 and Code Sec. 1502;

(6) Section 6.21, relating to changes in depreciation as a result of applying the additional first year depreciation regulations;

(7) Section 6.22, relating to depreciation of tangible property under Code Sec. 168(g) by controlled foreign corporations;

(8) Section 7.01, relating to a change in method of accounting for the treatment of expenditures that qualify as research and experimental expenditures under Code Sec. 174;

(9) Section 9.01, relating to a change in method of accounting for the costs of computer software to a method described in Rev. Proc. 2000-50;

(10) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers;

(11) Section 12.02, relating to certain uniform capitalization (UNICAP) methods used by producers and reseller-producers;

(12) Section 12.14, relating to interest capitalization;

(13) Section 13.01, relating to a taxpayer changing its method of accounting to comply with Code Sec. 267;

(14) Section 15.10, relating to a specified transportation industry taxpayer that wants to change to the overall cash receipts and disbursement (cash) method;

(15) Section 15.17, relating to a change to the overall cash method or to a method of accounting in which a small business taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method for computing all other items of income and expense;

(16) Section 16.10, relating to changes in the timing of income recognition under Code Sec. 451(b) and (c);

(17) Section 16.10 is clarified to provide (i) an example on how the 5-year item eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 applies to changes made under Section 16.10 and (ii) the situations in which the cost-offset related inventory method changes apply, and to provide guidance regarding the ordering of concurrent cost-offset and cost-offset related inventory method changes;

(18) Section 20.01, relating to a taxpayer changing its timing of incurring liabilities for employee compensation, is modified with respect to medical services that are deferred compensation under Code Sec. 404;

(19) Section 20.12, relating to an accrual method taxpayer changing its treatment of Ratable Service Contracts to conform to the safe harbor method provided by Rev. Proc. 2015-39, is modified;

(20) Section 22.18, relating to a small business taxpayer that wants to change its Code Sec. 471 method of accounting for inventory is modified; and

(21) Section 26.04, relating to a change in basis of computing reserves under Code Sec. 807(f).

For a discussion of the rules for making changes authorized by the IRS automatic accounting method change rules, see Parker Tax ¶241,590.

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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