IRS Updates Accounting Method Change Procedure

(Parker Tax Publishing May 2018)

The IRS updated Rev. Proc. 2015-13, the revenue procedure for requesting IRS consent (both automatic and non-automatic) for an accounting method change, and Rev. Proc. 2017-30, which lists the accounting method changes eligible for IRS automatic consent. The new procedure is necessary because of changes made by the Tax Cuts and Jobs Act of 2017 and because certain sections of Rev. Proc. 2017-30 have been obsoleted. Rev. Proc. 2018-31.

In Rev. Proc. 2015-13, the IRS provides the general procedures under Code Sec. 446(e) and Reg. Sec. 1.446-1(e) to obtain IRS consent to change a method of accounting for federal income tax purposes. Specifically, it provides the general procedures to obtain the advance non-automatic IRS consent to change a method of accounting, as well as the procedures to obtain automatic IRS consent to change a method of accounting.

On May 9, the IRS issued Rev. Proc. 2018-31, which updates Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2017-30. In Rev. Proc. 2017-30, the IRS lists the changes in methods of accounting for which automatic IRS approval is available if the conditions in the procedure are met. Rev. Proc. 2018-31 supersedes much of Rev. Proc. 2017-30 by updating the list of automatic changes in method of accounting that have IRS approval. The new procedure is necessary because of changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) and because certain sections of Rev. Proc. 2017-30 have been obsoleted.

Rev. Proc. 2018-31 makes the following significant modifications to Rev. Proc. 2017-30:

(1) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified to provide that a small reseller is not permitted to make a change from a permissible UNICAP method to a permissible non-UNICAP inventory capitalization method in any tax year that it qualifies as a small reseller for any tax year beginning after December 31, 2017;

(2) Section 15.03, relating to taxpayers changing to the cash method of accounting, and Section 21.03 (now Section 22.03 of Rev. Proc. 2018-31), relating to changes to the small taxpayer exception from requirement to account for inventories under Code Sec. 471, are modified to provide that these changes do not apply for any tax year beginning after December 31, 2017;

(3) Section 15.14, relating to nonshareholder contributions to capital, is modified to provide that the change to accounting methods by a regulated public utility does not apply to contributions made after December 22, 2017, the date of enactment of the TCJA;

(4) Pursuant to Notice 2018-35, which provides transitional guidance relating to advance payments, Section 16.07, is modified to provide that the eligibility rule in Rev. Proc. 2015-13, Sec. 5.01, does not apply to a taxpayer that changes from an overall accrual method of accounting to either the full inclusion or deferral method for the taxpayer's first or second taxable year ending on or after May 9, 2018;

(5) Section 16.07, relating to advance payments, is modified to provide that a taxpayer is not permitted to make a change in method from the overall accrual method of accounting to the method of including advance payments in income in the year of receipt for any tax year beginning after December 31, 2017;

(6) Section 21.15 (now Section 22.15 of Rev. Proc. 2018-31), relating to sales-based vendor chargebacks, is modified to remove a paragraph relating to the temporary waiver of the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 because it is obsolete;

(7) Section 23.01 (now Section 24.01 of Rev. Proc. 2018), relating to certain taxpayers that have elected the mark-to-market method of accounting under Code Sec. 475(e) or (f), is modified to provide that the waiver of the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 no longer applies to this change. The waiver of the eligibility rule in Section 5.01(1)(d) of Rev. Proc. 2015-13 continues to apply to this change; and

(8) Section 23.02 (now Section 24.02 of Rev. Proc. 2018-31), relating to a taxpayer changing its method of accounting for securities or commodities from the mark-to-market method of accounting to a realization method of accounting, is modified to provide that the waiver of the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 no longer applies to this change. The waiver of the eligibility rule in Section 5.01(1)(d) of Rev. Proc. 2015-13 continues to apply to this change.

For a discussion of accounting method changes that have the automatic approval of the IRS and the procedures that must be followed in such cases, 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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