The IRS issued a revenue procedure (Rev. Proc. 2014-16) on Jan. 24 that provides taxpayers with rules for filing method changes under certain provisions of the final “repair regulations.”
The final repair regulations were released in September 2013 (TD 9636) and update the rules for when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted. (For a discussion of the regulations, see Tax Flash 2013-13.) The final regulations are effective for taxable years beginning on or after Jan. 1, 2014, but may be adopted early, for years beginning on or after Jan. 1, 2012.
Rev. Proc. 2014-16 supersedes Rev. Proc. 2012-19, which provided automatic method change procedures for complying with provisions of the 2011 temporary repair regulations. A second revenue procedure is expected to be issued in the near future to supersede Rev. Proc. 2012-20 and provide the rules for filing method changes under reproposed regulations regarding the disposition of depreciable property.
Consolidation of changes
The revenue procedure updates the comprehensive list of automatic method changes in Rev. Proc. 2011-14 by deleting several method changes and adding several new method changes. The revenue procedure consolidates changes under sections of the final regulations, thereby creating fewer designated number changes, and allows for combining multiple method changes on one Form 3115.
In general, the revenue procedure provides that changes in methods of accounting made to comply with the rules regarding materials and supplies, rotable and temporary spare parts, certain acquisition and sale costs, repair and maintenance costs, and improvements to tangible property are automatic method changes that can be filed on one Form 3115. The specific changes allowed are listed in the revenue procedure, and each is assigned a different automatic change number. Additionally, information related to each specific change being made will need to be disclosed on Form 3115. There are, however, simplified filing rules for small taxpayers (average annual gross receipts of $10 million or less for the three preceding taxable years).
The revenue procedure also allows taxpayers to file method changes to apply the provisions of the temporary regulations for a taxable year beginning on or after Jan. 1, 2012, and before Jan 1, 2014.
The method changes are generally made using a Section 481(a) adjustment. However, the adjustment for certain method changes relating to the acquisition of tangible property is made using a modified cut-off approach, which means that only amounts paid or incurred after Jan. 1, 2014 (or Jan. 1, 2012, if adopting early), are included in the Section 481(a) adjustment. The revenue procedure specifically allows the use of statistical sampling for most of the new method changes as long as the method used complies with the methods in Rev. Proc. 2011-42.
Certain scope limitations are waived for method changes under the revenue procedure to comply with the repair regulations for any taxable year beginning before Jan. 1, 2015. This generally means taxpayers may file the automatic method changes even though they are under IRS exam.
New automatic changes
The revenue procedure also includes two new method changes related to Section 263A. Taxpayers may now use the automatic procedures to change to a reasonable allocation method for allocating direct and indirect costs to self-constructed property. Additionally, an automatic method change was added to allow taxpayers who originate or acquire loans secured by real property and acquire the real property through foreclosure to discontinue applying Section 263A to capitalize additional costs to the property. The revenue procedure also allows electric transmission and distribution companies an additional year to adopt the safe harbor method described in Rev. Proc. 2011-43.
Decoupling from Unicap rules
Another significant change from Rev. Proc. 2012-19 is that the new revenue procedure removes the requirement to conform with the uniform capitalization (Unicap) rules under Section 263A as a prerequisite to making an automatic method change. This does not remove the requirement for taxpayers to comply with the Unicap rules, but noncompliance will not prevent filing an automatic change to comply with repair regulations.
The revenue procedure was effective as of Jan. 24, 2014.
Taxpayers will want to determine how the new rules provided in the regulations may affect their current methods of capitalizing or deducting costs to acquire or improve tangible property. You should also determine the timing for making automatic method changes under the revenue procedure to comply with the new rules and to take advantage of early adoption of favorable portions of the regulations. After the release of the revenue procedure including the rules for filing method changes for the disposition of depreciable property, Grant Thornton will host a webcast to cover important aspects of both revenue procedures.
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