The IRS on Jan. 31 released much-anticipated guidance (Rev. Proc. 2022-14) that includes an updated list of automatic method changes. Rev. Proc. 2022-14 supersedes Rev. Proc. 2019-43 and aggregates all the changes that were added or modified since the release of Rev. Proc. 2019-43. Rev. Proc. 2022-14 also removes certain obsolete terms and conditions and is generally effective Jan. 31, 2021.
Notably, Rev. Proc. 2022-14 adds one new subsection under Section 20.01, which allows a taxpayer using an overall accrual method of accounting to change its method of accounting for taking into account certain employee commission liabilities by properly applying the “2.5-month rule.” Prior to this addition, taxpayers were required to find an alternative way to file a method change. This change amplifies Section 20.01, which already included bonus compensation, vacation pay, and self-insured medical.
In addition to adding a new method change, the updated procedures make other significant changes including:
- Section 6.22: Depreciation of tangible property under Section 168(g) by controlled foreign corporations. This change is modified to allow taxpayers to combine Section 481(a) adjustments, or components of Section 481(a) adjustments, as long as they share all of the same characteristics as any other Section 481(a) adjustment. Prior to the change, taxpayers were required to separately state a Section 481(a) adjustment for each asset, which was often burdensome.
- Sections 7.01 and 9.01: Treatment of expenditures that qualify as research and experimental expenditures under Section 174, and computer software costs under Rev. Proc. 2000-50. To implement the change to Section 174 made by the 2017 Tax Cuts and Jobs Act (Pub. L. No. 115-97) (TCJA), these sections are modified to exclude method changes for amounts paid or incurred in a tax year for which Section 174, as amended by the TCJA, is in effect. Currently, that would apply to tax years beginning on or after Jan. 1, 2022.
- Sections 12.01 and 12.02: Taxpayers subject to certain uniform capitalization (UNICAP) methods. Taxpayers that use a simplified UNICAP method with the historic absorption ratio (HAR) may use the automatic method change procedures to change to certain different permissible UNICAP methods. However, taxpayers are still not allowed to use the automatic procedures to otherwise make or revoke an HAR election.
- Section 16.10: Treatment of timing of income recognition under Sections 451(b) and (c) (previously section 16.12 of Rev. Proc. 2019-43, as modified by Rev. Proc. 2021-34). The procedures clarify that if a taxpayer is both implementing a cost-offset method or advance payment cost-offset method for the first time—and is concurrently filing a cost-offset related inventory change—the taxpayer should file both changes in the year of implementation. The procedure also added an additional waiver of the five-year scope limitation under Section 5.01(1)(f) of Rev. Proc. 2015-13 for taxpayers that make certain changes in method of accounting to implement the final regulations with a $0 Section 481(a) adjustment, such that those changes would be disregarded for purposes of the limitation.
- Section 22.18: Treatment of Section 471 method of accounting for inventory for small business taxpayers. Similar to the modification to Section 16.10, this procedure added an additional waiver of the five-year scope limitation under Section 5.01(1)(f) of Rev. Proc. 2015-13 for taxpayers that make certain changes in method of accounting to implement the final regulations with a $0 Section 481(a) adjustment, such that those changes would be disregarded for purposes of the limitation.
- Section 26.04: Treatment of basis computation of Section 807(f) reserves for insurance companies. This section was modified to implement changes made by the TCJA. The procedures are clarified for a non-life insurance company that needs to implement a change in basis of computing life insurance reserves. The section provides that such taxpayer must net any Section 481(a) adjustments at the level of each item referred to in Section 807(c), and it also provides that a taxpayer that was an insurance company for the year of change does not accelerate a Section 481(a) adjustment solely because it changes from a life insurance company to a non-life insurance company or vice versa.
Rev. Proc. 2022-14 consolidates and modifies changes from previous lists of automatic changes. It is effective immediately, and taxpayers should carefully read the new rules to analyze what changes may impact them before filing a method change.
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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