IRS Issues Automatic Change Procedures to Comply with Small Business Accounting Regs

(Parker Tax Publishing December 2021)

The IRS issued procedures that taxpayers can use to obtain automatic consent to change methods of accounting to comply with the final regulations under Code Secs. 263A, 448, 460 and 471 that were issued at the end of 2020 in T.D. 9942. The IRS also provides procedures for taxpayers to revoke a syndicate election made under Prop. Reg. Sec. 1.448-2(b)(2)(i)(B) for tax years beginning on or after January 5, 2021, or in the case of a taxpayer that applied the final regulations early, for tax years in which the final regulations apply. Rev. Proc. 2022-9.

Background

The Tax Cuts and Jobs Act (TCJA) amended Code Sec. 448 by increasing the gross receipts threshold for eligibility to use the cash method of accounting to $25,000,000 (adjusted for inflation). It also amended Code Secs. 263A, 460, and 471 by modifying the exemptions from the requirements to apply certain rules for cost capitalization, long-term contracts, and inventories. The amendments to Code Secs. 263A, 447, 448, and 471 generally apply to tax years beginning after December 31, 2017. The amendments to Code Sec. 460 apply to contracts entered into after December 31, 2017, in tax years ending after December 31, 2017.

In Rev. Proc. 2018-40, the IRS provided automatic consent procedures for a taxpayer to change its methods of accounting to reflect the TCJA modifications to Code Secs. 263A, 448, 460, and 471. In 2020, the IRS published proposed regulations (REG-132766-18) under Code Secs. 263A, 448, 460, and 471. Prop. Reg. Sec. 1.448-2(b)(2)(iii)(B) provided an election to use allocations made in the immediately preceding tax year, instead of the current tax year's allocations, when determining if more than 35 percent of losses of a venture are allocated to limited partners or limited entrepreneurs for purposes of the syndicate definition under Prop. Reg. Sec. 1.448-2(b)(2)(i)(B). The election could be revoked only with the written consent of the IRS.

On January 5, 2021, the IRS published final regulations under Code Secs. 263A, 448, 460 and 471 (T.D. 9942) to implement the TCJA changes. The final regulations under Code Secs. 263A, 448, and 471 apply for tax years beginning on or after January 5, 2021, and the final regulations under Code Sec. 460 apply for contracts entered into in tax years beginning on or after January 5, 2021. However, a taxpayer may apply the final regulations for a tax year beginning after December 31, 2017, and before January 5, 2021 (or, in the case of final regulations under Code Sec. 460, for contracts entered into after December 31, 2017, in a tax year ending after December 31, 2017, and before January 5, 2021), provided that the taxpayer follows the procedures for filing a change in method of accounting in accordance with Reg. Sec. 1.446-1(e)(3)(ii).

A taxpayer that choose to apply the final regulations under Code Secs. 263A, 448, and 471 or rely on the proposed regulations under Code Secs. 263A, 448, and 471 for, a tax year beginning before January 5, 2021, or, in the case of the proposed and final regulations under Code Sec. 460, for contracts entered into after December 31, 2017, in a tax year ending after December 31, 2017, and before January 5, 2021, must follow the rules for changes in method of accounting under Code Sec. 446. Accordingly, such taxpayer cannot change its method(s) of accounting to apply the final regulations or rely on the proposed regulations on an amended federal income tax return.

Rev. Proc. 2019-43, as subsequently modified, contains the current List of Automatic Changes, which includes the modifications previously made by Rev. Proc. 2018-40. The List of Automatic Changes provides procedures by which a taxpayer may obtain automatic consent for changes in methods of accounting, including for small business taxpayers to implement the changes made by the TCJA under Code Secs. 263A, 447, 448, 460, and 471.

Rev. Proc. 2022-9

Last week, the IRS issued Rev. Proc. 2022-9, which modifies Rev. Proc. 2019-43 (as subsequently modified by Rev. Proc. 2021-34) to provide automatic consent procedures under Code Sec. 446 for taxpayers to change methods of accounting to comply with the final regulations published in T.D. 9942. Specifically, Rev. Proc. 2022-9 provides automatic change procedures for:

(1) small business taxpayers that want to apply a small business taxpayer exemption method under the final regulations;

(2) taxpayers that no longer qualify to apply a small business taxpayer exemption method;

(3) taxpayers that want to change from an accounting method that uses (i) an accrual method for purchases and sales of inventories and (ii) the cash method for computing all other items of income and expense, to an overall accrual method; and

(4) small business taxpayers that want to make a change to a method of accounting that uses (i) an accrual method for purchases and sales of inventories and (ii) the cash method for computing all other items of income and expense.

Rev. Proc. 2022-9 also provides a modified procedure for reseller-producers changing from a permissible simplified resale method to be consistent with other changes by allowing such taxpayers to change only to a permissible UNICAP method specifically described in the regulations. The procedure also has new provisions relating to changes within a small business taxpayer's Code Sec. 471(c) inventory method.

Rev. Proc. 2022-9 also modifies Rev. Proc. 2018-40 to remove the option of netting the remaining portion of a Code Sec. 481(a) adjustment that resulted from a prior method change. In addition, Rev. Proc. 2022-9 provides procedures for taxpayers to revoke an election made under Prop. Reg. Sec. 1.448-2(b)(2)(i)(B) for tax years beginning on or after January 5, 2021, or in the case of taxpayer that applies the final regulations early, for tax years in which the final regulations are applicable.

For a discussion of the small business exception to the uniform capitalization rules under Code Sec. 263A, see Parker Tax ¶242,420. For a discussion of the gross receipts test under Code Sec. 448(c), see Parker Tax ¶241,640. For a discussion of the accounting rules for long-term contracts under Code Sec. 460, see Parker Tax ¶245,630. For a discussion of taxpayers that are exempt from keeping inventories under Code Sec. 471(c), see Parker Tax ¶242,315. For a discussion of the income inclusion rule under Code Sec. 451, see Parker Tax ¶241,715.

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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