IRS Updates List of Automatic Changes for Accounting Methods.

(Parker Tax Publishing MAY 2016)

The IRS has issued a revised list of automatic changes to which the automatic change procedures of Rev. Proc. 2015-13 apply. Rev. Proc. 2016-29.

Background

Under Code Sec. 446(e), once a taxpayer has used an accounting method and filed a first return, the taxpayer must receive approval from the IRS before making any change to that accounting method. In general, a taxpayer must file a current Form 3115, Application for Change in Accounting Method, to request a change in either an overall accounting method or the accounting treatment of any item. In certain cases, the IRS issues revenue procedures granting a taxpayer automatic consent to change an accounting method as long as the provisions of the revenue procedure are followed.

In January 2015, the IRS issued two revenue procedures effectively split former Rev. Proc. 2011-14 in two parts; Rev. Proc. 2015-13 contains the general procedures for changing methods of accounting, either with IRS consent or automatically, and Rev. Proc. 2015-14 lists the automatic changes originally contained in the appendix to Rev. Proc. 2011-14.

In Rev. Proc. 2019-29, the IRS issued an updated list of automatic changes to which the automatic change procedures of Rev. Proc. 2015-13 apply. Accordingly, the new revenue procedure amplifies, modifies, and partly supersedes Rev. Proc. 2015-14.

Significant Changes in Revenue Procedure 2016-29

The following is a list of some of the more important changes made by Rev. Proc. 2016-29 affecting the List of Automatic Changes:

(1) Section 6.01, relating to impermissible to permissible methods of depreciation or amortization, is amplified and modified to provide that a taxpayer cannot make a change under that section for any property for which the taxpayer has claimed a federal income tax credit. This change in method of accounting must be made under the non-automatic change procedures in Rev. Proc. 2015-13. Previously, section 6.01 did not apply to property for which the taxpayer claimed the rehabilitation credit under Code Sec. 47 and is reclassifying under Code Sec. 168(e);

(2) Section 6.20, relating to the revocation of a partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that such revocation must be made, and the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply, for any taxable year beginning after December 31, 2013, and ending before December 31, 2016. Previously, this revocation of the partial disposition election had to be made, and these eligibility rules did not apply for a change, under section 6.20 for the first or second taxable year beginning after December 31, 2013;

(3) Section 11.08, relating to changes for tangible property, is modified to provide that this section does not apply to amounts paid or incurred for repair and maintenance costs that the taxpayer is changing from capitalizing to deducting and for which the taxpayer has claimed a federal income tax credit or elected to apply Reg. Sec. 168(k)(4). This change in method of accounting must be made under the non-automatic change procedures in Rev. Proc. 2015-13;

(4) Section 11.10, relating to the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply for any taxable year beginning after December 31, 2013, and ending before December 31, 2016. Previously, these eligibility rules did not apply for a change under section 11.10 for the first or second taxable year beginning after December 31, 2013;

(5) Section 18.01 of Rev. Proc. 2015-14, relating to changes for long-term contracts to the percentage-of-completion method described in Reg. Sec. 1.460-4(b), is removed from the revenue procedure in its entirety. This change in method of accounting must be made under the non-automatic change procedures in Rev. Proc. 2015-13;

The following sections were added to the List of Automatic Changes to provide additional changes in method of accounting: (a) Section 10.01, relating to changes for start-up expenditures under Code Sec. 195; (b) Section 12.14, relating to changes for interest capitalization under Code Sec. 263A; and (c) Section 21.17, relating to certain changes within the retail inventory method under Code Sec. 471.

In addition, Rev. Proc. 2016-29 extends the waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 by one year to any tax year beginning before January 1, 2016, for the following sections: (a) Section 6.13, relating to depreciation of leasehold improvements under Reg. Sec. 1.167(a)-4; (b) Section 6.14, relating to a change from a permissible to another permissible method of accounting for depreciation of MACRS property under Reg. Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8; (c) Section 6.15, relating to dispositions of a building or structural component under Reg. Sec. 1.168(i)-8; (d) Section 6.16, relating to dispositions of tangible depreciable assets (other than a building or its structural components) under Reg. Sec. 1.168(i)-8; (e) Section 6.17, relating to dispositions of tangible depreciable assets in a general asset account under Reg. Sec. 1.168(i)-1; and (f) Section 11.08, relating to changes for tangible property under the final tangible property regulations.

Effective Date and Transition Rules

In general, Rev. Proc. 2016-29 is effective for Forms 3115 filed on or after May 5, 2016, for a year of change ending on or after September 30, 2015, that is filed under the automatic change procedures of Rev. Proc. 2015-13.

If before May 5, 2016, a taxpayer filed a Form 3115 under the non-automatic change procedures in Rev. Proc. 2015-13 requesting the IRS's consent for a change in method of accounting described in Rev Proc. 2016-29, and the Form 3115 is pending with the national office on May 5, 2016, the taxpayer may choose to make the change in method of accounting under the automatic change procedures in Rev. Proc. 2015-13. The taxpayer must notify the national office before the later of (1) June 6, 2016, or (2) the issuance of a letter ruling granting or denying consent for the change.

Additional transition rules apply for Forms 3115 filed for changes in methods of accounting that can no longer be filed under the automatic change procedures.

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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