IRS Updates Automatic Accounting Method Change Procedures

(Parker Tax Publishing May 2017)

The IRS updated Rev. Proc. 2015-35, the revenue procedure for requesting automatic IRS consent for an accounting method change. The new procedure modifies, clarifies, and obsoletes certain sections of Rev. Proc. 2015-13, as modified and clarified by Rev. Proc. 2016-29, and adds three new automatic accounting method changes. Rev. Proc. 2017-30.

On April 19, the IRS issued Rev. Proc. 2017-30, which updates Rev. Proc. 2015-35. Rev. Proc. 2015-35, as clarified and modified by Rev. Proc. 2016-29, provides the procedures for requesting automatic IRS consent for certain accounting method changes. The new procedure modifies, clarifies, and obsoletes certain sections of Rev. Proc. 2016-29. It also adds three new automatic accounting method changes for which IRS consent is granted. The definitions in Section 3 of Rev. Proc. 2015-23 continue to apply to Rev. Proc. 2017-30.

In Rev. Proc. 2017-30, the IRS added the following changes to the list of automatic change procedures:

(1) changes relating to organizational expenditures under Code Sec. 248;

(2) changes relating to organization fees under Code Sec. 709; and

(3) changes relating to changes from currently deducting inventory to a permissible method of identifying and valuing inventories.

In addition, Rev. Proc. 2017-30 made significant changes to the list of automatic changes in Rev. Proc. 2016-29 (which modified and clarified Rev. Proc. 2015-35) by:

(1) Removing certain paragraphs relating to inapplicable eligibility rules because those paragraphs are now obsolete;

(2) Removing certain sections of Rev. Proc. 2016-29 which have become obsolete in their entirety;

(3) Modifying the rules relating to partial dispositions of tangible depreciable assets to which IRS adjustment pertain to provide that they does not apply to any partial disposition election specified in Reg. Sec. 1.168(i)-8(d)(2)(i) that is not made pursuant to Reg. Sec. 1.168(i)-(d)(2)(iii);

(4) Changes to the provisions relating to the disposition of a building or structural component and the removal of related provisions that are now obsolete;

(5) Changes to the provisions relating to certain partial dispositions of an asset;

(6) Modifications of the accounting method change rules relating to start-up expenditures to include a change in the amortization period of a start-up expenditure to 180 months;

(7) Elimination of obsolete provisions relating to (i) a change in the treatment of acquisition and holding costs for real property acquired through foreclosure; (ii) a change for sales-based royalties; and (iii) a change in the treatment of sales-based vendor chargebacks under a simplified method;

(8) Modification of provisions relating to capitalizing interest with respect to the production of designated property to include changes from an improper method of capitalizing interest under Reg. Sec. 1.263A-8 through Reg. Sec. 1.263A-14 to capitalizing interest in accordance with Reg. Sec. 1.263A-8 through Reg. Sec.1.263A-14;

(9) Modification of rules relating to capitalizing interest with respect to the production of designated property to include changes from an improper method of capitalizing interest to a proper method and to require that the statement attached to a Form 3115 must include details regarding the taxpayer's sub-methods of accounting for determining capitalizable interest in accordance with Reg. Sec. 1.263A-8 through Reg. Sec. 1.263A-14;

(10) Modification of the rule relating to a change from an improper method of inclusion of rental income or expense to inclusion in accordance with the rent allocation to clarify that the procedure does not apply to rental agreements that provide a specific allocation of fixed rent as described in Reg. Sec. 1.467-1(c)(2)(ii)(A)(2) that allocate rent to periods other than when such rents are payable;

(11) Modification of the rules relating to impermissible methods of identification and valuation of inventory, to clarify that: (i) a taxpayer can make a change under the automatic consent provisions if the taxpayer is changing from an impermissible method of identifying or valuing inventories under Code Sec. 471, and/or an impermissible method described in Reg. Sec. 1.471-2(f)(1) through (5); (ii) a taxpayer cannot make a change under the automatic consent provisions to allocate costs to inventory under Code Sec. 471 nor under Code Sec. 263A; and (iii) a taxpayer cannot make a change under the automatic consent provisions if the taxpayer is currently deducting inventories;

(12) Modification of the rules relating to permissible methods of identification and valuation of inventory, to clarify that a taxpayer cannot make a change under the automatic consent rules to allocate costs to inventory under Code Sec. 471 nor under Code Sec. 263A;

(13) Modification of the rules relating to certain taxpayers that have elected to use the mark-to-market method of accounting under Code Sec. 475(e) or (f) to provide that the eligibility rule in Section 5.01(1)(d) of Rev. Proc. 2015-13 does not apply to this change; however, the waiver of the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13 continues to apply to this change;

(14) Modification of the rule relating to taxpayers changing their method of accounting from the mark-to-market method of accounting described in Code Sec. 475 to a realization method of accounting to clarify that such a change is not limited to a change required by Code Sec. 475;

(15) Modification of the rule relating to change in qualification as life/nonlife insurance company to clarify that this change applies to an insurance company that changes from being treated as a life insurance company under part I of subchapter L to being treated as a non-life insurance company under part II of subchapter L, or vice versa; and

(16) Modification of the rule relating to the revocation of the Code Sec. 1278(b) election to provide that, for certain purposes, a taxpayer also is treated as having made a deemed Code Sec. 1278(b) election for a tax year if, for one or more market discount bonds that were acquired by the taxpayer during that tax year, the taxpayer includes in gross income on the tax return for that tax year and on the tax return for the following tax year the market discount attributable to each tax year, other than as a result of a disposition of the bond or a partial principal payment on the bond.

Generally, Rev. Proc. 2017-30 is effective for a Form 3115 filed on or after April 19, 2017, for a year of change ending on or after August 31, 2016, that is filed under the automatic change procedures of Rev. Proc. 2015-13. However certain transition rules apply under which taxpayers have a limited time period to convert a Form 3115 filed under the non-automatic change procedures in Rev. Proc. 2015-13.

For a discussion of the rules relating to automatic accounting method changes, 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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com