The IRS issued a revenue procedure (Rev. Proc. 2017-30) on April 19 updating the comprehensive list of automatic method changes that may be made under procedures for changes in method of accounting in Rev. Proc. 2015-13. The new procedures generally are effective immediately and add new automatic method changes, modify many existing method changes, and remove a few method changes.
Rev. Proc. 2015-13 contains the procedures for requesting consent for both automatic and non-automatic accounting method changes. The comprehensive list of method changes that are eligible for automatic consent is published in a separate procedure (first Rev. Proc. 2015-14, then Rev. Proc. 2016-29, and now Rev. Proc. 2017-30) to allow the IRS and Treasury to more easily update the list.
New and removed automatic changes
Rev. Proc. 2017-30 provides three new automatic method changes, removes several obsolete automatic changes, and modifies quite a few other automatic changes. The following method changes are now automatic:
- Organizational expenditures: Two separate method changes under Section 248 and Section 709 for the characterization of an item as an organizational expenditure, the determination of the tax year in which the taxpayer’s active trade or business to which the organizational expenditures relate begins, or the amortization period of such expenditures over 180 months.
- Inventory: Method changes from currently deducting inventories to capitalizing using permissible methods of identification and valuation of inventories.
Additionally, Rev. Proc. 2017-30 incorporates two method changes that were published last year:
- Interties: Transfers of interties under the safe harbor in Notice 2016-36.
- Net asset value method: Changes to or from the net asset value method for money market funds under Rev. Proc. 2016-39.
Rev. Proc. 2017-30 removes several obsolete method changes, such as changes relating to late partial disposition elections and revocation of a taxpayer’s general asset account election. Many of the automatic change sections were modified and renumbered due to the additions and deletions.
Rev. Proc. 2015-13 generally provides that taxpayers are not eligible to make an automatic method change if they made a change to the same item within the previous five taxable years or are in the final year of their trade or business. One or both of these eligibility requirements were previously waived for certain changes made within a specified time frame. Many of these waivers became obsolete and were removed.
Rev. Proc. 2017-30 adds a new waiver of the eligibility requirement related to the final year of a taxpayer’s trade or business for taxpayers electing to use the mark-to-market method of accounting under Section 475(e) or (f).
Notable modifications to existing method changes
Rev. Proc. 2017-30 updates and modifies other existing automatic method changes. The updates and modifications include but are not limited to the following:
- Start-up expenditures: Includes a change in the amortization period of Section 195 start-up expenditures to 180 months.
- Tangible property: Does not apply to a change from capitalizing to deducting repair and maintenance costs for which a taxpayer has claimed a federal income tax credit, elected to apply Section 168(k)(4), or received a payment under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009.
- Interest capitalization: Includes changes from an improper method of capitalizing interest to capitalizing interest in accordance with Treas. Reg. Sec. 1.263A-8 through 14. Also requires a statement related to the details of the taxpayer’s sub-methods for determining capitalized interest.
- Improper inclusion of rental income or expenses: Clarifies that the change does not apply to a specific allocation of fixed rent that allocates rent to periods other than when such rents are payable.
- Impermissible method of identification and valuation of inventories: Reinstates the restriction that the taxpayer’s current method be impermissible under Treas. Reg. Sec. 1.471-2(f)(1)-(5) or one of the specifically stated methods in the procedure. Also does not apply to (i) a change to allocate costs to inventory under Section 471 or Section 263A, or (ii) a taxpayer currently deducting inventories.
- From mark-to-market method to realization method: Clarifies that the change is not limited to a change required by Section 475.
Rev. Proc. 2017-30 is effective for all automatic Forms 3115 filed on or after April 19, 2017, for a year of change ending on or after Aug. 31, 2016. Transition rules allow taxpayers that filed a non-automatic method change before April 19 to convert it to an automatic change if the taxpayer is otherwise eligible to use Rev. Proc. 2017-30 and the automatic procedures in Rev. Proc. 2015-13. In such a case, the taxpayer must notify the IRS National Office it intends to file under the automatic procedures before the later of May 19, 2017, or the issuance of a letter ruling granting or denying consent for the change. If timely notification is received, the IRS National Office will send a letter acknowledging the request and refund the taxpayer’s user fee.
Transition rules are also provided for changes that are no longer automatic under the Rev. Proc. If before April 19, 2017, a taxpayer properly filed the original, or the duplicate copy of a Form 3115 under the automatic procedures of Rev. Proc. 2015-13 for a change that can no longer be filed under the automatic change procedures, the taxpayer may make that change using the automatic change procedures for the year of change. Changes filed after this time have to be filed under the non-automatic procedures, with the exception that for a taxpayer’s last taxable year ending before April 19, 2017, the due date for filing such non-automatic method change is extended to the due date of the federal return for such year, including extensions (even if the taxpayer did not extend its return).
Implications and next steps
Because Rev. Proc. 2017-30 is effective immediately, all method changes filed under the automatic procedures in Rev. Proc. 2015-13 must conform to these new procedures. Taxpayers planning to file automatic method changes after April 19, 2017, should review Rev. Proc. 2017-30 to determine if their method change is affected. It is particularly important to note that the section numbers have changed and are different from the original procedures that created the automatic change.
Additionally, taxpayers that have filed non-automatic method changes that have now been added or amplified under the Rev. Proc. should determine whether their change would now qualify as automatic. If the method changes are still pending with the IRS National Office, taxpayers should consider converting to the automatic change procedure to receive a refund of their user fee. To convert, a taxpayer must notify the IRS by May 19, 2017.
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