• IRS Releases Updated Automatic Changes in Methods of Accounting List
  • April 24, 2017 | Authors: Ellen McElroy; Michael D. Resnick; Bradley M. Seltzer; Amish M. Shah; H. Karl Zeswitz
  • Law Firm: Eversheds Sutherland (US) LLP - Washington Office
  • On April 19, 2017, the Internal Revenue Service (IRS) released Rev. Proc. 2017-30, 2017-17 I.R.B. 1, which provides an updated list of automatic changes in methods of accounting. As was the case with its predecessor, Rev. Proc. 2016-29, the list of automatic changes remains governed by the automatic change procedures of Rev. Proc. 2015-13. Rev. Proc. 2017-30 will officially be published in I.R.B. 2017-17 on April 24, 2017, and will take effect for any Forms 3115 filed on or after April 19, 2017, for a year of change ending on or after August 31, 2016. Beyond the typical removal of paragraphs or sections that are now obsolete, notable changes include:
    • The addition of three new automatic changes in methods of accounting:
      • Section 10.02 was added to provide an automatic change for organizational expenditures under § 248, similar to the automatic change available for start-up expenditures, which is to change a taxpayer’s method of accounting under § 248 to either: (1) the characterization of an item as an organizational expenditure; (2) the determination of the taxable year in which the corporation begins business to which the organizational expenditures relate; or (3) the amortization period of an organizational expenditure to 180 months.
      • Section 10.03 was added to provide an automatic change for organization fees under § 709, similar to the automatic change available for start-up expenditures, which is to change a taxpayer’s method of accounting under § 709 to either: (1) the characterization of an item as an organizational expense; (2) the determination of the taxable year in which the partnership begins business to which the organizational expense relates; or (3) the amortization period of an organizational expense to 180 months.
      • Section 21.18 was added to provide an automatic change for taxpayers seeking to change from currently deducting inventory to a permissible method of identifying and valuing inventories.
    • With respect to partial dispositions of tangible depreciable assets to which the IRS adjustment pertains, the change has been modified to not apply to any partial disposition election specified in § 1.168(i)-8(d)(2)(i) that is not made pursuant to § 1.168(i)-8(d)(2)(iii). Previously, the change did not apply to any partial disposition election specified in § 1.168(i)-8(d)(2)(i) that was not made pursuant to § 1.168(i)-8(d)(2)(iv).
    • With respect to dispositions of a building or structural component, the change has been modified to not apply to any disposition of a portion of an asset in a transaction described in the last sentence in § 1.168(i)-8(d)(1) for which the taxpayer did not make a partial disposition election in accordance with § 1.168(i)-2(d)(iv). Previously, the change did not apply to any disposition of a portion of an asset in a transaction described in the last sentence of § 1. 1.168(i)-8(d)(1) for which the taxpayer did not make a partial disposition election in accordance with § 1.168(i)-2(d)(ii) or (iii).
    • With respect to start-up expenditures, the automatic changes under § 195 to change the characterization of an item as a start-up expenditure or the determination of the taxable year in which the taxpayer’s active trade or business begins to which the start-up expenditure relates, have been supplemented with an additional change, which is a change in the amortization period of a start-up expenditure to 180 months.
    • Previously for automatic changes regarding tangible property, the changes did not apply to amounts paid or incurred for repair and maintenance costs that the taxpayer was changing from capitalizing to deducting and for which the taxpayer had claimed a federal income tax credit or elected to apply § 168(k)(4). This section has been supplemented with an additional exclusion. That is, the automatic change does not apply to a change to amounts paid or incurred for repair and maintenance costs that the taxpayer is changing from capitalizing to deducting and for which the taxpayer has received a payment for specified energy property in lieu of tax credits under section 1603 of the American Recovery and Reinvestment Tax Act of 2009.
    • The automatic change for interest capitalization has been supplemented to now include changes from an improper method of capitalizing interest under §§ 1.263A-8 through 14 to capitalizing interest in accordance with §§ 1.263A-8 through 14. Changes in interest capitalization methods also must now require the statement attached to Form 3115 to include details regarding the taxpayer’s sub-methods of accounting for determining capitalizable interest in accordance with §§ 1.263A-8 through 14.
    • The automatic change from an improper method of inclusion of rental income or expense to inclusion in accordance with the rent allocation has been revised to make it more clear that the change does not apply to rental agreements that provide a specific allocation of fixed rent described in § 1.467-1(c)(2)(ii)(A)(2) that allocates rent to periods other than when such rents are payable.
    • The automatic changes relating to impermissible methods of identification and valuation of inventory have been revised to make it clear that a taxpayer can make a change under this section if the taxpayer is changing from an impermissible method of identifying or valuing inventories under § 471, and/or an impermissible method described in §§ 1.471-2(f)(1) through (5). Further, the change now explicitly does not allow taxpayers to make a change to allocate costs to inventory under § 471 or § 263A, and a taxpayer cannot make this change if it is currently deducting inventories.
    • For changes related to the mark-to-market method of accounting under § 475(e) or§ 475(f), the eligibility rule in § 5.01(1)(d) of Rev. Proc. 2015-13 no longer applies. Furthermore, a taxpayer seeking to change its method of accounting from the mark-to-market method of accounting described in § 475 to a realization method of accounting is not limited to a change required by § 475. Rev. Proc. 2017-30 provides an example of an optional change from a mark-to-market method of accounting for notional principal contracts providing for non-periodic payments for a taxpayer that isn’t even subject to § 475.
    • With respect to the revocation of the § 1278(b) election, a taxpayer will now be treated as having made a deemed § 1278(b) election for a taxable year if, for one or more market discount bonds that were acquired by the taxpayer during that taxable year, the taxpayer includes in gross income on the tax return for that taxable year and on the tax return for the following taxable year the market discount attributable to each taxable year, other than as a result of a disposition of the bond or a partial principal payment on the bond.