United States

IRS releases final component of tangible property transition guidance

TAX ALERT  | 

On Sept. 18, 2014, the IRS released guidance providing transition rules to adopt the final regulations on dispositions of tangible property. Rev. Proc. 2014-54 provides automatic method change procedures to adopt the final regulations governing the federal income tax treatment of dispositions of tangible property, as well as the treatment of assets included in one or more general asset accounts (GAAs). Taxpayers should consult with their tax advisors to determine whether any of these changes should be utilized to ensure compliance with the regulations for their first tax year beginning in 2014.

In September 2013, the IRS released re-proposed regulations governing the treatment of dispositions of tangible assets and the treatment of assets included in GAAs. Although in proposed form, the IRS issued the regulations as reliance guidance. Shortly after their release, the IRS issued Rev. Proc. 2014-17, providing automatic method change procedures to adopt portions of the proposed regulations for tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. On Aug. 14, 2014, the IRS finalized these regulations with minor clarifications and modifications (see our article, IRS releases final disposition regulations). 

Rev. Proc. 2014-54 is the final piece of expected guidance to assist taxpayers in transitioning to the final tangible property regulations.  This revenue procedure modifies Rev. Proc. 2014-17 by updating relevant citations to the final disposition regulations and extending several favorable provisions that taxpayers may rely on in making changes to adopt the regulations for tax years beginning in 2014. Following are highlights from Rev. Proc. 2014-54:

  • Taxpayers are able to make a partial disposition election for a prior year under Reg. section 1.168(i)-8(d)(2) through the filing of a Form 3115 for tax years beginning before 2015. This represents a one-year extension of the limited period for which the IRS will treat the late partial disposition election as a method change. After this period, taxpayers will generally be required to request a private letter ruling to make a late partial disposition election.
  • Taxpayers have the ability to revoke one or more GAA elections through the filing of a Form 3115 for tax years beginning before 2015. This represents a one-year extension to treat the revocation of a GAA election as a method change. After this limited period, taxpayers will generally be unable to revoke prior-year GAA elections. Taxpayers should note that the alternative method change, making a late GAA election, is only available for tax years beginning before 2014. Thus, while fiscal-year taxpayers may still have time to make late GAA elections by filing a Form 3115, this option is no longer available to calendar-year taxpayers.
  • The scope limitations under the general automatic method change procedures of Rev. Proc. 2011-14 are generally waived for taxpayers making changes under the final disposition regulations for tax years beginning before 2015. This is a favorable provision that provides taxpayers under IRS exam with the ability to make changes required to adopt the final regulations without waiting for a window period or obtaining the director's consent to file the change under the automatic consent procedures. However, Rev. Proc. 2014-54 also clarifies that if the accounting method is an issue pending with respect to an IRS exam or is an issue under consideration before IRS Appeals or a federal court, the taxpayer will not receive audit protection for prior-year treatment.
  • The scope limitations under the general automatic procedures of Rev. Proc. 2011-14 are now waived for taxpayers making a depreciation method change concurrently with a change in method under the final disposition regulations, as long as such changes are made for the same asset, on the same Form 3115, and for the same tax year. Although this limited waiver only applies for Forms 3115 filed for tax years beginning before Jan. 1, 2015, this provision is taxpayer-favorable and provides relief for taxpayers under IRS exam by eliminating the need to obtain the director's consent in order to file for depreciation changes alongside one or more changes under the final disposition regulations.

Rev. Proc. 2014-54 is applicable for Forms 3115 filed on or after Sept. 18, 2014, but provides transition rules for taxpayers with one or more Forms 3115 currently pending with the IRS National Office. If, as of Sept. 18, 2014, a taxpayer has a non-automatic Form 3115 under the final disposition regulations pending with the IRS, the taxpayer may withdraw the form and re-submit it under the automatic procedures within 30 days after the date of the IRS's letter returning the Form 3115 to the taxpayer. Alternatively, if a taxpayer filed one or more automatic Forms 3115 under Rev. Proc. 2014-17 on or before Sept. 18, 2014, the taxpayer may be able to continue with such filing or may file an amended Form 3115 under Rev. Proc. 2014-54 with an amended tax return for the year of change.

Implications:

The issuance of Rev Proc. 2014-54 is welcome news for taxpayers waiting for the last piece of guidance under the final tangible property regulations. Overall, the extensions and procedures provided in Rev. Proc. 2014-54 are taxpayer-favorable. The guidance should allow taxpayers (regardless of whether they are under exam or have made similar changes within the past five years) to request the necessary method changes to ensure compliance with the final disposition regulations for their first tax year beginning on or after Jan. 1, 2014. Under this guidance, taxpayers have until they timely file their tax returns, including proper extensions, for the year of change to request a change in method of accounting under the final disposition regulations. Thus, calendar-year taxpayers may have until Sept. 15, 2015, to file any required method changes for their 2014 tax year. Taxpayers should work with their tax advisors to determine whether any changes in method of accounting should be requested under this new guidance and to ensure compliance with the final tangible property regulations by their first tax year beginning in 2014.

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