IRS releases updated list of automatic method changes
TAX ALERT |
On May 5, 2016, the IRS released Rev. Proc. 2016-29 (guidance) that provides the List of Automatic Changes (List) permitted to be filed under Rev. Proc. 2015-13, and supersedes Rev. Proc. 2015-14, which contained the current list of automatic changes and makes significant changes to the former guidance (see our previous alert, IRS releases updated procedures for changes in accounting methods).
Some of the significant changes in the guidance include:
- Taxpayers can no longer make an automatic change for an impermissible to a permissible method of accounting for depreciation (Change 7) on any property for which the taxpayer claimed a federal income tax credit.
- Taxpayers can no longer make an automatic change for amounts paid or incurred for repair and maintenance costs from capitalizing to deducting if the taxpayer has claimed a federal tax credit or made the election to accelerate alternative minimum tax (AMT) credits in lieu of taking bonus depreciation under the related to tangible property changes.
- Taxpayers can no longer make an automatic change to the percentage-of-completion method for long-term contracts.
- The expansion of a taxpayer’s ability to change its method of accounting for the identification and valuation of inventory to allow a change if the taxpayer is change from an impermissible method of accounting under section 471. Previously a taxpayer could only use the automatic change procedures if the change was from an impermissible method of accounting described in Reg. sections 1.471-2(f)(1) through (5).
In addition, the revenue procedure extends the waiver of the eligibility rules for a prior five-year item change, a change made in a taxpayer’s final year of a trade or business, and/or a prior change in a taxpayer’s overall method of accounting for certain changes and removes multiple obsolete automatic changes. The obsolete changes generally relate to changes filed under certain temporary and proposed regulations for tangible property.
The guidance also adds two more changes to the List relating to start-up expenditures under section 195 and interest capitalization under section 263A.
The revenue procedure is effective for a Form 3115 filed on or after May 5, 2016, for a year of change ending on or after Sept. 30, 2015, unless the taxpayer is within the scope of the following transition rules:
- For certain requested changes for property to which a taxpayer has claimed a federal credit or property to which a taxpayer elected to claim the AMT credit in lieu of bonus depreciation, that taxpayer is no longer eligible to file that change request if the original or duplicate copy of Form 3115 has not been filed prior to May 5, 2016. If the taxpayer has not yet filed the original or duplicate copy prior to May 5, 2016, it must make that change under the non-automatic procedures of Rev. Proc. 2015-13.
- For a requested change previously listed in Rev. Proc. 2015-14, section 18.01 (a change related to changes for long-term contracts to the percentage-of-completion method), which has been removed from the List in Rev. Proc. 2016-29, a taxpayer must file the original or duplicate copy of the requested automatic change prior to June 6, 2016. If the taxpayer does not file the change under the automatic change procedures of Rev. Proc. 2015-13 prior to that date, the taxpayer must request the change under the non‑automatic procedures of Rev. Proc. 2015-13.
Additionally, if a taxpayer has filed a Form 3115 under the non-automatic change procedures in Rev. Proc. 2015-13 and Rev. Proc. 2016-29 has added the requested change to the List, a taxpayer has a limited time to resubmit a Form 3115 under the automatic change procedures, provided the non-automatic Form 3115 is still pending with the IRS National Office on May 5, 2016. The guidance provides procedures for taxpayers to signal their intent with the IRS National Office and taxpayers must notify the national office contact person of that intent prior to the later of June 6, 2016, or the issuance of a letter ruling granting or denying change for that non-automatic change request.
The release of this guidance impacts every taxpayer requesting to change one of its methods of accounting using the automatic change procedures. As the List has been revised from Rev. Proc. 2015-14 for certain additions and deletions, as well as the rearrangement of certain changes, taxpayers and their advisors not only need to be aware of the significant changes, but also must be cognizant that even if a change had no modification from Rev. Proc. 2015-14 to Rev. Proc. 2016-29, it may be listed under a different section of the List. Fortunately the IRS did not rename any of the designated change numbers. With the immediate effective date for the majority of changes and the transition guidance provided for certain changes, taxpayers and their advisors must ensure the requested automatic change is still applicable and filed under the correct section of Rev. Proc. 2015-14 or Rev. Proc. 2016-29, depending on which is applicable.