Executive summary:
Rev. Proc. 2023-24 unveiled: What taxpayers need to know about updated list of automatic accounting method changes
Newly released Rev. Proc. 2023-24 brings various updates to tax accounting method changes that may impact many taxpayers. The new revenue procedure is generally effective for method changes filed on or after June 15, 2023 for years ending on or after Oct. 31, 2022. While most existing changes are not significantly modified, the revenue procedures includes changes related to depreciation, research and development expenses, and mark-to-market elections and revocations. Taxpayers will need to carefully navigate these revised procedures, paying close attention to ensure compliance and to effectively manage their tax obligations.
IRS releases updated list of automatic changes for 2022
On June 15, the Internal Revenue Service unveiled its yearly update to the accounting method changes to which the automatic change procedures under Rev. Proc. 2015-13 apply. The newly issued Rev. Proc. 2023-24 updates Rev. Proc. 2022-14 (the prior revenue procedure covering automatic method changes) by incorporating several interim accounting method changes issued through separate IRS guidance and clarifying, modifying and obsoleting certain existing changes.
Rev. Proc. 2023-24 is generally effective for method changes filed on or after June 15, 2023 for a year of change ending on or after Oct. 31, 2022; however, transition rules apply to allow taxpayers that have already filed an accounting method change request (i.e., Form 3115) to continue processing the change under previous procedures. Additionally, where a change is no longer automatic, the transition rules allow taxpayers additional time to request an accounting method change under the non-automatic method change procedures in Rev. Proc. 2015-13.
Although most automatic accounting method changes remain unmodified, there are a number of changes that include updates and new requirements. Following is an outline of the major updates and what they mean for taxpayers.
Newly incorporated procedures
Rev. Proc. 2023-24 incorporates several automatic method changes that were released in the interim period after the last annual update to the list of automatic changes. While Rev. Proc. 2023-24 largely incorporates those changes as written, the revenue procedure adds certain additional requirements and clarifications. Unless a taxpayer falls under the transition rule for changes filed before June 15, 2023 taxpayers may no longer solely rely on the individual sources of guidance and must now follow the procedures as described in Rev. Proc. 2023-24.
Incorporated changes and modifications include:
- Gas transmission and distribution property (section 3.12 of Rev. Proc. 2023-24)
Section 3.12 incorporates the safe harbor method under Rev. Proc. 2023-15 for taxpayers who transmit and distribute natural gas and incur significant expenditures to maintain, repair, replace and improve natural gas transmission and distribution property. However, Rev. Proc. 2023-24 clarifies Rev. Proc. 2023-15 in certain respects. First, Rev. Proc. 2023-24 adds a new requirement that taxpayers include a statement agreeing to certain terms and conditions for changes related to public utility property. Second, Rev. Proc. 2023-24 provides that a section 481(a) adjustment may not include amounts related to property for which the taxpayer elected to capitalize repair and maintenance costs under Reg. section 1.263(a)-3(n) for any taxable year in which the election was made.
- Specified research and experimental expenditures under section 174 (section 7.02 of Rev. Proc. 2023-24)
Section 7.02 incorporates the automatic method change procedures issued in Rev. Proc. 2023-11 for implementing the new capitalization and amortization rules for specified research and experimental expenditures under section 174. This change remains largely unmodified; however, Rev. Proc. 2023-24 adds welcome clarity on the effect of the method change on specified research costs if a taxpayer is presently treating as inventoriable or capitalizable to the basis of depreciable property. Specifically, the automatic method change explicitly includes a change from capitalizing specified research and experimental expenditures as inventoriable or depreciable property (and recovering through the cost of goods sold or depreciation) to capitalizing and recovering such costs under section 174.
- Alternative cost method for common improvement costs (section 20.14 of Rev. Proc. 2023-24)
New section 20.14 incorporates automatic change procedures issued in Rev. Proc. 2023-9 for certain property developers’ treatment of common improvement costs. Rev. Proc. 2023-9 provided favorable updates to the applicability of the alternative cost method (ACM) under Rev. Proc. 92-29 allowing certain property developers to take into account future estimated common improvements in calculating the gain or loss on sales of benefitted property.
Key changes to existing automatic changes
The IRS also revises the terms and conditions of certain existing changes. These include:
- Impermissible to a permissible method of accounting for depreciation or amortization (section 6.01 of Rev. Proc. 2023-24)
Taxpayers are now able to make a depreciation change for property for which the taxpayer has claimed a federal income tax credit, as long as such change does not impact the claimed federal income tax credit amount. Previously, taxpayers were unable to make an automatic depreciation change for property for which a federal income tax credit was claimed regardless of the impact on the credit. As an increasing number of taxpayers claim federal income tax credits as a result of the Inflation Reduction Act, this provision may provide relief to taxpayers that find they are using impermissible depreciation methods.
- Changes in the timing of income recognition under section 451(b) and (c) (section 16.08 of Rev. Proc. 2023-24)
Section 16.08 extends the prior 5-year change eligibility waiver for an automatic change to comply with revenue recognition rules under section 451(b) and (c) to the taxpayer's second taxable year beginning on or after Jan. 1, 2021. Previously, the waiver only applied to the first tax year beginning on or after Jan. 1, 2021. While this is a welcome relief for many taxpayers that failed to implement the new section 451 rules for their 2021 tax year, the extension of the eligibility waiver still provides a limited window that generally only covers 2022 filings. Taxpayers with multiple short periods as a result of M&A activity may find themselves outside of this expanded eligibility waiver window.
- Mark-to-market accounting methods (section 24 of Rev. Proc. 2023-24)
The new guidance gives taxpayers additional clarity on procedures for changing to or from mark-to-market methods where previous mark-to-market elections were made or revoked within the past five years.
Specifically, taxpayers making a mark-to-market election under section 475(e) or (f) are unable to use the automatic method change to change to a market-to-market method if the taxpayer has revoked such an election within the past five taxable years. Instead, the taxpayer must submit a request to change to the mark-to-market election under the non-automatic procedures of Rev. Proc. 2015-13. Such taxpayers must still file an election statement under Rev. Proc. 99-17 and section 24.01(4) of Rev. Proc. 2023-24.
Similarly, taxpayers revoking an election under section 475(e) or (f) within five years of making the election are unable to use the automatic procedures to change from the mark-to-market method to a realization method. A taxpayer who has revoked an election within the past five taxable years must submit a request to go to a realization method under the non-automatic procedures of Rev. Proc. 2015-13. Such taxpayers must also file the notification statement required under section 24.02(7) of Rev. Proc. 2023-24.
Sections removed from the previous procedures
Rev. Proc. 2023-24 eliminates several method changes that have become obsolete due to various law changes. Obsoleted changes include the following:
- Late elections or revocation of elections under section 168(k)(5), (7), and (10);
- Revocation of a historic absorption ratio election;
- Revenue recognition of advance payments under Rev. Proc. 2004-34;
- Changes in the timing of recognition of income due to adopting ASC 606, Revenue from Contracts with Customers for financial statement purposes; and
- Changes to revenue recognition under the proposed regulations under section 451(b) and (c).
Transition rules and timing
Rev. Proc. 2023-24 takes immediate effect, applying to accounting method changes filed on or after June 15, 2023, for a tax year of change ending on or after Oct. 31, 2022. This means that Rev. Proc. 2023-24 is generally applicable for accounting method changes made for taxpayers’ 2022 tax year.
Transition rules apply to give relief to taxpayers with pending method change requests that are affected by changes in Rev. Proc. 2023-24.
First, taxpayers that have filed a pending non-automatic method change request may convert the change to an automatic change request if the subject of the method change is now covered by Rev. Proc. 2023-24. Affected taxpayers can generally withdraw their pending requests and convert the change to an automatic change after notifying the IRS National Office. These taxpayers are also eligible for a user fee refund.
If an automatic method change no longer meets the criteria for using automatic change procedures, taxpayers are still allowed to implement the change under Rev. Proc. 2022-14 and the automatic change procedures if they properly filed the original, or a duplicate copy, of the Form 3115 before June 15, 2023.
Taxpayers wishing to make a change that was automatic under Rev. Proc. 2022-14 but is no longer automatic, and who failed to file the duplicate copy of the Form 3115 before June 15, 2023, may submit a non-automatic Form 3115 to request to change the accounting method for the taxpayer's last taxable year ending prior to June 15, 2023, provided they do so on or before the due date (including extensions) of the federal income tax return for that taxable year.
Washington National Tax Takeaways
All method changes filed on or after June 15, 2023 must follow new procedures, so any taxpayer that is planning to request a method change for a year ending on or after Oct. 31, 2022 should contact their tax advisor to discuss the implications of the updated revenue procedure. Further, while the transition rules in Rev. Proc. 2023-24 provide flexibility to taxpayers, their application depends on the taxpayer’s specific facts; taxpayers should make sure to discuss with their tax advisor any pending method changes that may benefit from or require modification.
