IRS updates list of automatic accounting method changes

In general, any automatic method change may be filed by the due date of the income tax return for the year of the change and is filed without a user fee. Nonautomatic (advance consent) method changes must be filed before the last day of the tax year, require IRS review and approval, and require a user fee.

Revenue Procedure 2022-14 makes the following significant changes to the list of automatic accounting method changes:

Depreciation

• To comply with the final regulations under IRC Section 168(k) for additional first-year depreciation, Section 6.21 of the revenue procedure clarifies that a taxpayer may amend a tax return to change depreciation methods only before the tax return for the subsequent year is filed. This rule is consistent with other changes in depreciation methods.
• For taxpayers making multiple changes in the depreciation of tangible property for a controlled foreign corporation (CFC), Section 6.22 of the revenue procedure is modified to require a single IRC Section 481(a) adjustment for all items that share the same characteristics such as source, separate limitation classification, character, and treatment under Section 7.07(2) of Revenue Procedure 2015-13, as modified by Revenue Procedure 2021-26.

Research and development (R&D)

• The following changes no longer are available for taxable years beginning after Dec. 31, 2021, so long as amendments to IRC Section 174 under the Tax Cuts and Jobs Act of 2017 are in effect:
• Section 7.01, relating to a change in the treatment of R&D expenses
• Section 9.01, relating to a change in the treatment of software costs

Capitalization

• Sections 12.01 and 12.02, relating to various uniform capitalization (UNICAP) changes under IRC Section 263A, are modified to allow taxpayers presently using a historic absorption ratio to make changes to a simplified UNICAP method.
• Under Section 12.14, taxpayers no longer may change their method from capitalizing interest to not capitalizing interest, or vice versa, if the changes are related to improvements that involve the associated property rules defined under Treasury Regulation Section 1.263A-11.

Small businesses

• For small-business taxpayers changing to an overall cash method of accounting (including hybrid methods of accounting using an accrual method for inventories), Section 15.17 of the revenue procedure is modified to clarify that any remaining IRC Section 481(a) adjustment related to a previous method change to the accrual method must be accelerated.
• For small-business taxpayers making changes to comply with final regulations under IRC Section 471(c) for inventory, Section 22.18 of the revenue procedure provides a waiver of the five-year item eligibility rule if both of the following apply:
• The change is made for the taxpayer’s early application year beginning before Jan. 5, 2021, or for the taxpayer’s first taxable year beginning on or after Jan. 5, 2021.
• The Section 481(a) adjustment required to implement the change is zero.

Revenue recognition

• For changes in the timing of revenue recognition under IRC Sections 451(b) and (c), Section 16.10 of the revenue procedure contains several changes, including the following:
• Clarification that a change to the full inclusion method under the proposed regulations must be made with a Section 481(a) adjustment.
• For changes to comply with the final regulations under IRC Section 451(b) and 451(c), except for changes relating to the cost offset method, the five-year limitation on making multiple changes to the same item under Revenue Procedure 2015-13 is disregarded if both of the following apply:
• The change is made for the taxpayer’s early application year beginning before Jan. 1, 2021, or for the taxpayer’s first taxable year beginning on or after Jan. 1, 2021.
• The Section 481(a) adjustment required to implement the change is zero.
• An example illustrating how the five-year item eligibility rule applies to changes made by Section 16.10 and the situations in which the cost-offset-related inventory method changes apply.
• Guidance regarding the ordering of concurrent cost-offset and cost-offset-related inventory method changes.

Other changes

• Section 13.01, concerning changes to properly account for related-party expenses under IRC Section 267, is modified to clarify that a taxpayer may change its method for the deduction of amounts owed to a CFC that does not have any U.S. shareholders owning stock of the CFC.
• For taxpayers changing the timing of incurring liabilities for employee compensation and self-insured medical benefits, Section 20.01 of the revenue procedure is modified to expand the change to cover employee commissions and states a taxpayer may not include amounts for medical services that are deferred compensation under IRC Section 404.

Transition rule for pending request for consent

Revenue Procedure 2022-14 includes transition rules for taxpayers that previously filed an advance consent Form 3115 that is pending with the national office and that now is eligible to use the automatic change procedures under the updated rules for automatic accounting method changes. Taxpayers making this request must inform the IRS that the advance consent change will be converted to an automatic method change, and the IRS will issue a letter acknowledging the request in addition to refunding user fees. These taxpayers can refile the Form 3115 as an automatic change without the user fee. Taxpayers that had filed the duplicate copy of the Form 3115 under Revenue Procedure 2019-43 have the option to either implement the change under that revenue procedure or refile the duplicate copy under the new revenue procedure.

Looking forward

Taxpayers should work with their tax advisers to carefully review the updates to the list of automatic accounting method changes to determine whether a new opportunity exists to file an accounting method change under the automatic procedures.