United States: IRS Updates List Of Automatic Method Changes

The IRS issued a revenue procedure (Rev. Proc. 2016-29) on May 5 that replaces Rev. Proc. 2015-14 and provides a new comprehensive list of automatic method changes that may be made under procedures for changes in method of accounting in Rev. Proc. 2015-13. The Rev. Proc. added several new automatic method changes and modifies existing method changes.  

Background

In January 2015, the IRS and Treasury released new combined comprehensive accounting method change procedures for both automatic and non-automatic method changes in Rev. Proc. 2015-13. But the comprehensive list of automatic method changes was published in a separate procedure (Rev. Proc. 2015-14) to allow the IRS and Treasury to more easily update the list, as is being done with new Rev. Proc. 2016-29. As part of the transition to Rev. Proc. 2015-13, special rules provide additional time for a taxpayer to change an accounting method under the terms and conditions of the old, superseded procedures in Rev. Proc. 2011-14 for certain 2014 federal income tax returns.

New Automatic Changes

Rev. Proc. 2016-29 provides three new automatic method changes, removes several obsolete automatic changes, removes the automatic change under Section 460 and modifies quite a few other automatic changes. The following method changes are now automatic:

  • Startup costs: Method changes under Section 195 on the characterization of an item as a startup expenditure or the determination of the tax year in which the taxpayer's active trade or business to which the startup expenditures relate begins.
  • Interest capitalization: Method changes from either not capitalizing any interest or capitalizing interest in accordance with the book method to capitalizing using the avoided cost method in accordance with Treas. Regs. Sections 1.263A-8 through 14.
  • Retail inventory method: Method changes from including temporary markdowns in determining the retail selling price of goods on hand at the end of the taxable year to omitting them.

Rev. Proc. 2016-29 also removes the automatic change for long-term contracts as defined in Section 460(f) to the percentage of completion method. This change in method of accounting must now be made under the non-automatic change procedures, which require advance consent from the IRS.

Additionally, Rev. Proc. 2016-29 removes several obsolete method changes, such as changes under obsolete temporary regulations. Many of the automatic change sections were renumbered due to the additions and deletions.

Eligibility waiver extensions

Rev. Proc. 2015-13 generally provides that taxpayers are not eligible to make an automatic method change if they made a change to the same item within the previous five taxable years or in the final year of their trade or business. These eligibility requirements were previously waived for changes to implement the tangible property regulations for taxable years beginning before Jan. 1, 2015. This waiver has been extended to tax years beginning before Jan. 1, 2016, only for the rule barring method changes to the same item within five years.  

Additionally, the waivers for both of these eligibility requirements are extended for the automatic change to adopt the retail and restaurant remodel-refresh safe harbor in Rev. Proc. 2015-56, which includes a change to revoke a prior partial disposition election. Previously, the revocation of the partial disposition election had to be made on a taxpayer's first or second taxable year beginning after Dec. 31, 2013. Now this change can be made and scope limitations are waived for taxable years beginning after Dec. 31, 2013, and ending before Dec. 31, 2016.

Notable modifications to existing method changes

Rev. Proc. 2016-29 updates and modifies a host of other existing automatic method changes including:

  • Impermissible to permissible method of depreciation: Updated to clarify that it does not apply to any property for which the taxpayer has claimed a federal income tax credit.
  • Repair and maintenance costs: Updated to clarify that it does not apply to any property for which the taxpayer has claimed a federal income tax credit or elected to apply Section 168(k)(4).
  • Related party transactions: Modified to remove the eligibility requirements for a change to the same item within the prior five years for changes to comply with Section 267(a)(3).
  • Impermissible to permissible method of inventory identification and valuation: Removes the restriction that the taxpayers current method be impermissible under Treas. Reg. Sec. 1.471-2(f)(1)-(5). The present method can now be any impermissible method under Sec. 471.

Effective date

Rev. Proc. 2016-29 is effective for all automatic Forms 3115 filed on or after May 5, 2016, for a year of change ending on or after Sept. 20, 2015. Transition rules allow taxpayers who filed a non-automatic method change before May 5 to convert it to an automatic change if it was added to the list of automatic changes in Rev. Proc. 2016-29. In such a case, the taxpayer must notify the IRS National Office no later than June 6, 2016, that it intends to file under the automatic procedures. If timely notification is received, the IRS will refund the taxpayer's user fee.

Transition rules are also provided for changes that are no longer automatic under the Rev. Proc. Automatic method changes filed before May 5, 2016, related to depreciation and repairs and maintenance on property subject to a federal income tax credit can still use the automatic procedures. Changes filed after this time have to be filed under the non-automatic procedures, with the exception that for a taxpayer's last taxable year ending before May 5, 2016, the due date for filing such non-automatic method change is extended to the due date of the federal return for such year, including extensions (even if the taxpayer did not extend its return).

For a change to the percentage of completion method for long-term contracts, any change filed before June 6, 2016, may be done using the automatic procedures. Changes filed after June 6, 2016, must be filed under the non-automatic procedures with the exception that for a taxpayer's last taxable year ending before June 6, 2016, the due date for filing such non-automatic method change is extended to the due date of the federal return for such year, including extensions (even if the taxpayer did not extend its return).

Implications and next steps

Because Rev. Proc. 2016-29 is effective immediately, all method changes filed under the automatic procedures in Rev. Proc. 2015-13 must conform to these new procedures.  Taxpayers planning to file automatic method changes after May 5, 2016, should review Rev. Proc. 2016-29 to determine if their method change is affected. It is particularly important to note that the section numbers have changed and are different from the original procedures that created the automatic change.

Taxpayers planning to file an automatic method change to go to the percentage of completion method should take note that after June 6, 2016, such change will no longer be automatic.  

Additionally, taxpayers who have filed non-automatic method changes that have now been added or amplified under the Rev. Proc. should determine whether their change would now qualify as automatic. This includes changes involving startup costs, interest capitalization, the retail inventory method or a change from an impermissible method of identifying or valuing inventory under Section 471. If the method changes are still pending with the IRS National Office, taxpayers should consider converting to the automatic change procedure to receive a refund of their user fee. To convert, a taxpayer must notify the IRS by June 6, 2016.  

The waiver of certain eligibility requirements for certain changes under the tangible property regulations and for changes to the retail and restaurant remodel-refresh safe harbor is also a welcome change. Many taxpayers needed more time to comply, and this will provide them the time they need.  

Additionally, many taxpayers continued to rely on the old automatic procedures in Rev. Proc. 2011-14 for filing automatic changes with their 2014 federal income tax returns.  The release of the new procedures does not appear to affect the ability for fiscal year filers to continue to file automatic changes with the fiscal 2014 federal income tax returns under Rev. Proc. 2011-14.

Finally, taxpayers should note that the IRS has released a new version of the Form 3115 (revised December 2015) that is required to be used on all changes now. Additionally, Rev. Proc. 2016-1 updated Rev. Proc. 2015-13 to provide that the duplicate copy that used to be filed in Ogden, Utah, is now required to be filed with the IRS center in Covington, Ky.   

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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