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Modification of automatic accounting method change rules for tangible property dispositions

Rev Proc 2014-54, 2014-41 IRB

In a Revenue Procedure, IRS has provided guidance on making automatic accounting method changes that coordinates with recently issued final regs on dispositions of tangible property. Among other things, IRS made a number of modifications to Rev Proc 2011-14’s Appendix and allowed for a late partial disposition election under Reg. § 1.168(i)-8 to be treated as a change in method of accounting for a limited period of time.

Background on MACRS regs. IRS recently issued Reg. § 1.168(i)-1, Reg. § 1.168(i)-7, and Reg. § 1.168(i)-8 (the final regs). Reg. § 1.168(i)-1 provides rules for general asset accounts. Reg. § 1.168(i)-7 provides rules for accounting for property depreciated under Code Sec. 168 (MACRS property). Reg. § 1.168(i)-8 provides rules for dispositions of MACRS property.

The final regs apply to tax years beginning on or after Jan. 1, 2014, but also permit a taxpayer to choose to apply the final regs to tax years beginning on or after Jan. 1, 2012. Alternatively, the final regs permit a taxpayer to apply the temporary regs (Reg. § 1.168(i)-1T, Reg. § 1.168(i)-7T, and Reg. § 1.168(i)-8T; or to rely on the proposed regs (Prop Reg § 1.168(i)-1, Prop Reg § 1.168(i)-7, and Prop Reg § 1.168(i)-8 ;  for, tax years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014.

Background on accounting method changes. Except as otherwise expressly provided by the Code or regs, Code Sec. 446(e) and Reg. § 1.446-1(e)(2) require a taxpayer to secure IRS’s consent before changing an accounting method for federal income tax purposes. The regs specify changes in depreciation or amortization that are and those that are not changes in a method of accounting. (Reg. § 1.446-1(e)(2)(ii)(d))

Rev Proc 2011-14 provides procedures for a taxpayer to obtain automatic consent to change to a method of accounting in its Appendix. Reg. § 1.446-1(e)(2)(ii)(d)(5)(iii) provides that except as otherwise expressly provided by the Code, regs, or other guidance published in the Internal Revenue Bulletin, no Code Sec. 481(a) adjustment (i.e., to prevent amounts from being duplicated or omitted) is required or permitted for a change from one permissible method of computing depreciation or amortization to another permissible method of computing depreciation or amortization for an asset. Instead, such a change is implemented by either a cut-off method (Rev Proc 2011-14, Sec. 2.06) or a modified cut-off method, as appropriate. Under the modified cut-off method, the adjusted depreciable basis of the asset as of the beginning of the year of change is recovered using the new permissible method of accounting.

Changes in methods of accounting. Except as otherwise provided, a change to comply with Reg. § 1.168(i)-1, Reg. § 1.168(i)-7, and Reg. § 1.168(i)-8 is a change of accounting to which Code Sec. 446(d) applies. A taxpayer that wants to change to a method of accounting described in Rev Proc 2014-54, Sec. 3.03 must use the automatic change in method of accounting provisions in Rev Proc 2011-14, as modified. Special rules apply for assets placed in service in a tax year ending before 2003. (Rev Proc 2014-54)

Changes to Rev Proc 2011-14 Appendix. Rev Proc 2014-54 modifies the Appendix of Rev Proc 2011-14 by:

  • Removing section 6.19 (lessor improvements abandoned at termination of lease) because it is obsolete;
  • Revising section 6.29 (disposition of a building or structural component) to provide that such section does not apply to, among other things, any demolition of a structure to which Code Sec. 280B and Reg. § 1.280B-1 apply;
  • Revising sections 6.32 (general asset account elections), 6.34 (revocation of a general asset account election), and 6.35 (partial dispositions of tangible depreciable assets to which the IRS’s adjustment pertains) to allow these changes in method of accounting to be made under Reg. § 1.168(i)-1 or Reg. § 1.168(i)-8;
  • Revising section 6.33 (late partial disposition election) to allow a late partial disposition election under Reg. § 1.168(i)-8 to be treated as a change in method of accounting for a limited period of time;
  • Revising section 6.37 (permissible to permissible method of accounting for depreciation of MACRS property) to provide additional changes in method of accounting that are consistent with Reg. § 1.168(i)-1 or Reg. § 1.168(i)-8;
  • Revising section 10.11 (tangible property) to clarify that this section of the Appendix does not apply to amounts paid or incurred for certain materials and supplies that the taxpayer has elected to capitalize and depreciate under Reg. § 1.162-3(d) or Reg. § 1.162-3T(d) ; and
  • Adding sections 6.38 through 6.40 to the Appendix to provide additional changes in method of accounting that are consistent with Reg. § 1.168(i)-1 or Reg. § 1.168(i)-8.

Each of the above changes is described in greater detail in Rev Proc 2014-54. Such details include, among other things: the manner of making the change; taxpayers and assets that the change does or does not apply to; the applicability of Code Sec. 481(a) adjustments, certain scope limitations, and audit protection; and the effect of multiple concurrent changes.

Chart of changes in methods of accounting. Rev Proc 2014-54 also provides a chart that summarizes the changes in methods of accounting under Reg. § 1.167(a)-4, Reg. § 1.168(i)-1, Reg. § 1.168(i)-7, and Reg. § 1.168(i)-8 that a taxpayer may make under Rev Proc 2011-14. The chart provides the applicable final reg, the section number in the Appendix of Rev Proc 2011-14, the designated change number (DNC), and guidance that a taxpayer may refer to for more information. Another chart summarizes the changes in methods of accounting that a taxpayer that applies the proposed or temporary regs for a tax year beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014, may make under Rev Proc 2011-14

Effective date and transition rules. Rev Proc 2014-54 is generally effective Sept. 18, 2014, but is subject to a number of transition rules. For example, there is a transition rule for a Form 3115 filed under Rev Proc 97-27, 1997-1 CB 680 that is still pending with the national office on Sept. 18, 2014, and a Form 3115 filed under Rev Proc 2014-17 to either apply the temporary or proposed regs for a tax year beginning on or after Jan. 1, 2012 and beginning before Jan. 1, 2014, or to apply Reg. § 1.168(i)-7 for a tax year beginning on or after Jan. 1, 2012.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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