The IRS has released guidance (Rev. Proc. 2023-24) that provides an updated list of automatic method changes that adds, removes, and modifies certain sections of the previously provided by Rev. Proc. 2022-14. The revised procedure is generally effective as of June 15, 2023, and provides transition rules for certain taxpayers that have already filed method changes either with the IRS National Office in Washington D.C. or with the IRS Service Center in Ogden, Utah.
The procedure does not add new method changes but incorporates automatic method changes that have been added since Rev. Proc. 2022-14—specifically, Section 3.12 for natural gas transmission and distribution property under Rev. Proc. 2023-15 (see our prior article), and Section 7.02 for specified research and experimentation expenditures under Rev. Proc. 2023-11 (see our prior article).
In addition to incorporating the two new automatic changes, this revenue procedure removes several obsolete changes, and revises many others. It also cleans up many expired terms and conditions.
Obsolete method changes
The following sections from Rev. Proc. 2022-14 are obsolete and no longer applicable to any timely tax returns filed on or after June 15, 2023, and have been removed:
- Section 6.18 – making/revoking late elections for bonus depreciation under Sections 168(k)(5), (7) and (10)
- Section 12.18 – revocation of historic absorption ratio election for taxpayers using simplified UNICAP methods
- Section 16.06 – revenue recognition of advance payments under Rev. Proc. 2004-34
- Section 16.09 – changes in timing of recognition of income due to adopting ASC 606, Revenue from Contracts with Customers
Procedures that have been revised from prior guidance
Certain terms and conditions in the following sections of Rev. Proc. 2023-24 have been modified and clarified, which generally expand the availability of the automatic procedures. Additionally, a number of obsolete terms and references have been removed. Below are the sections with modifications and clarifications:
- Section 3.12 – treatment of natural gas transmission and distribution property. This procedure was modified to require an additional statement if any asset is public utility property. The Section 481(a) adjustment was clarified such that it may not include any amounts attributable for property for which the taxpayer elected to capitalize repair and maintenance costs by following its financial statements or books and records.
- Section 6.01 – impermissible to permissible method for depreciation or amortization. The inapplicability section for this change was modified to provide that the change does not apply to any property for which the taxpayer has claimed a federal income tax credit unless the change does not alter the amount of the federal income tax credit.
Grant Thornton Insight
With all the tax credits available (e.g., R&D credit and energy credits introduced by the Inflation Reduction Act), taxpayers must carefully examine the effect of claiming different credits and the impact to depreciation of their fixed assets. This is a welcome clarification because previously, the guidance only provided that if a federal income tax credit was claimed, this method change could not be used.
- Section 7.02 – specified research or experimental expenditures for tax periods beginning after Dec. 31, 2021. This procedure clarifies the guidance from Rev. Proc. 2023-11 such that the change clearly includes a change from capitalizing R&E expenditures to inventoriable property or depreciable property and recovering these expenses using cost of sold goods (COGS) or depreciation to the Section 174 capitalization and amortization method.
Grant Thornton Insight
This is another welcome clarification for taxpayers because it provides that taxpayers did not have to be expensing R&E expenditures previously to take advantage of the automatic method change.
- Section 15.01 – overall cash method to the accrual method. This modifies certain defined terms and clarifies that this section also applies to taxpayers wanting to change from using the accrual method for purchases and sales of inventories and the cash method for all other items of income and expense to an accrual method.
- Section 16.08 (formerly 16.10 of Rev. Proc. 2022-14) – tax revenue recognition under the final regulations. The procedure extends the five-year scope limitation eligibility waiver for one additional year so that the limitation generally does not apply for a taxpayer’s first or second taxable year beginning on or after Jan. 1, 2021. Additionally, it provides special Section 481(a) adjustment rules when the eligibility waiver applies.
- Section 20.10 – gift cards issued as a refund for returned goods. The procedure clarifies that if a taxpayer is making a change under this section and an automatic change to use the deferral method for the same taxable year, the taxpayer may do so on a single Form 3115.
- Sections 24.01 and 24.02 – commodities dealers, securities dealers and commodities traders electing to use the mark-to-market method and such taxpayers electing to use the realization method. These sections provide that making or revoking the election after either making or revoking the election within the past five taxable years requires filing a Form 3115 under the non-automatic procedures of Rev. Proc. 2015-13, in addition to filing an election statement. When the non-automatic Form 3115 is required for the use of the realization method, it is required to be implemented on a cut-off basis.
Effective date and transition rules
As noted above, the procedures are effective immediately for any changes that are filed on or after June 15, 2023, if the year of change ends on or after Oct. 31, 2022. Effectively, any taxpayer that has not yet timely-filed a tax return and has also not yet filed a duplicate copy of the method change either with the Ogden IRS office or with the IRS National Office, as appropriate, must follow the new procedures. The IRS provided transition rules for certain scenarios:
- If the taxpayer properly filed the Ogden copy of a Form 3115 before June 15, 2023, for a change that continues to qualify under the automatic procedures, the taxpayer has the option to continue to implement the change as described in Rev. Proc. 2022-14, as modified prior to June 15, 2023, or alternatively to refile the duplicate copy under the new procedures.
- For a taxpayer that is filing a method change that can no longer be filed under the new automatic procedures for any reason:
- If the change was filed, either the original or the Ogden copy prior to June 15, 2023, then the taxpayer may continue to make that change under the automatic procedures
- If the change was NOT filed, either the original or the Ogden copy, prior to June 15, 2023, then the taxpayer must instead file the change under the non-automatic procedures, with an extended due date if it is for a taxable year ending before June 15, 2023.
- If the taxpayer had previously filed a non-automatic method change that would now qualify under these automatic procedures, the revenue procedure provides a limited-time transition rule to convert the filing to an automatic change.
Grant Thornton Insight
It will be critical to determine if a copy of the requested change has been filed with the IRS because that will determine which procedures a taxpayer is eligible to use. Taxpayers that have already filed a copy have flexibility to refile under the new procedures. However, if a copy has not been filed, then taxpayers must update their Form 3115 and other supporting documents to conform to the new procedures. This will also impact all Section 174 statements in lieu of a Form 3115 that are required to make the change to capitalize R&E expenditures to the extent that they have not already been filed on a tax return.
Rev. Proc. 2023-24 consolidates and modifies a number of procedures from the previous list of automatic changes. Because the guidance is effective immediately for tax years ending after Oct. 31, 2022, taxpayers need to carefully examine the status of any current method changes and the transition rules to determine the correct actions, if any, necessary to effectuate the changes.
For more information, contact:
Sharon Kay is the National Managing Partner of Grant Thornton LLP's Washington National Tax Office. Sharon has over 25 years of tax experience and primarily advises clients on federal income tax issues such as accounting method changes, income and expense recognition, inventories, tangible and intangible asset capitalization and recovery, and certain business credits.
Washington DC, Washington DC
- Strategic federal tax
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