The IRS has issued a new comprehensive list of automatic method changes (Rev. Proc. 2018-31
) effective immediately. The new list does not add any automatic method changes, but does remove several obsolete changes. The revenue procedure also provides that several changes no longer apply to years beginning after Dec. 31, 2017, because of the enactment of the Tax Cuts and Jobs Act (TCJA), but it does not otherwise modify existing changes or add additional changes to allow taxpayers to conform to statutory modifications made by the legislation.
Rev. Proc. 2018-31 supersedes Rev. Proc. 2017-30 as the new comprehensive list of accounting method changes that are eligible for automatic consent. This list is separate from Rev. Proc. 2015-13
, which contains the actual procedures for requesting consent for both automatic and non-automatic accounting method changes. The list of automatic method changes is kept separately so the IRS can update it easily.
Rev. Proc. 2018-31 removes obsolete language from several automatic changes. The revenue procedure also modifies several changes impacted by tax reform to provide that they no longer apply to years beginning after Dec. 31, 2017. However, the new procedures do not add any new automatic changes, whether due to TJCA or otherwise. In addition, the guidance does not modify any existing procedures that would allow taxpayers to make method changes to conform to the modifications made by the TJCA.
The revenue procedure states that the IRS expects to issue separate guidance providing procedures for making method changes to implement the new $25 million gross receipts threshold added to Sections 263A, 448, and 471 by the TJCA. Additionally, the IRS expects to issue procedures related to other provisions modified by the TJCA, like the modifications to revenue recognition under Section 451. See, for example, Notice 2018-35
, which provides transitional guidance on advance payments.
Rev. Proc. 2018-31 also renumbers existing sections after 18 to add a new section 19 for special rules for long-term contracts under Section 460, though it is reserved as no automatic method was added yet.
Modifications to existing automatic changes
Rev. Proc. 2018-31 makes significant modifications to section 16.07, relating to changes for advance payments either to Deferral Method or the Full Inclusion method under Rev. Proc. 2004-34. That automatic change is modified to provide a waiver of the eligibility rule for the five-taxable-year limitation to a taxpayer that changes to a method of accounting provided under section 16.07(1)(a)(i) for the taxpayer’s first or second taxable year ending on or after May 9, 2018. This was discussed in Notice 2018-35.
Several of the changes also remove the waiver of the eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13. That rule generally states that taxpayers are not allowed to file a method change in the final year of the trade or business (the “final year of the trade or business limitation”). Thus, removing the waiver means those changes are no longer eligible for the automatic procedures in the final year of the trade or business. Other changes remove the waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, which generally states that taxpayers are not allowed to file a method change for the same item if they changed that item in the past five taxable years (the “five-taxable-year limitation”). Thus, removing the waiver means those changes are no longer eligible for the automatic procedures for a taxpayer that has changed the same item within the past five taxable years. The automatic changes that were modified for these waivers include:
- Section 6.11, relating to a change in the depreciation of leasehold improvements, is modified to remove the temporary waiver of the eligibility rule for five-taxable-year limitation. The waiver for the final year of the trade or business limitation continues to apply to this change.
- Section 11.10, relating to a change to the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to remove the temporary waiver of both the eligibility rule for the final year of the trade or business limitation and the five-taxable-year limitation.
- Section 21.15 of Rev. Proc. 2017-30 (now section 22.15 of Rev. Proc. 2018-31), relating to sales-based vendor charge-backs, is modified to remove the temporary waiver of the eligibility rule for the five-taxable-year limitation.
- Section 23.01 of Rev. Proc. 2017-30 (now section 24.01 of Rev. Proc. 2018-31), relating to certain taxpayers that have elected the mark-to-market method of accounting under Section 475(e) or (f), is modified to provide that the waiver of the eligibility rule for the five-taxable-year limitation no longer applies to this change. The waiver of the eligibility rule for the final year of the trade or business limitation continues to apply to this change.
- Section 23.02 of Rev. Proc. 2017-30 (now section 24.02 of Rev. Proc. 2018-31), relating to a taxpayer changing its method of accounting for securities or commodities from the mark-to-market method of accounting described in Section 475 to a realization method of accounting, is modified to provide that the waiver of the eligibility rule for the five-taxable-year limitation no longer applies to this change. The waiver of the eligibility for the final year of the trade or business limitation continues to apply to this change.
Additionally, Rev. Proc. 2018-31 modifies the following method changes to no longer apply for any taxable year beginning after Dec. 31, 2017 (or as otherwise noted below):
- Section 12.01(1)(a)(i), relating to certain uniform capitalization (UNICAP) methods used by small resellers, as defined in section 12.01(3)(b) of this revenue procedure
- Section 15.03, relating to taxpayers changing to overall cash receipts and disbursements (cash) method
- Section 21.03 (now section 22.03 of this revenue procedure), relating to the small taxpayer exception from requirement to account for inventories under Section 471
- Section 16.07(1)(a)(ii), relating to a taxpayer changing to including advance payments in income in the year of receipt under Treas. Reg. Sec. 1.451-5
- Section 15.14, relating to non-shareholder contributions to capital under Section 118, is modified to provide that the change described in section 15.14(1)(a)(ii) does not apply to contributions made after Dec. 22, 2017, the date of enactment of the Act
Finally, section 6.18, relating to the revocation of the partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is obsolete and is removed from the revenue procedure in its entirety.
Rev. Proc. 2018-31 is effective for all automatic Forms 3115 filed on or after May 9, 2018, for a year of change ending on or after Sept. 30, 2017. Transition rules similar to those provided in Rev. Proc. 2017-30 are available, allowing taxpayers who filed a non-automatic method change before May 9 to convert it to an automatic change if the taxpayer is otherwise eligible.
Transition rules are also provided for changes that are no longer automatic under the revenue procedure. If before May 9, 2018, 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 May 9, 2018, the due date for filing such a 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).
Because Rev. Proc. 2018-31 is effective immediately, all method changes filed under the automatic procedures in Rev. Proc. 2015-13 must conform to these new procedures. Taxpayers that have already filed the copy of a Form 3115 for an automatic change under the old procedures with the IRS in Covington, Ky., but have not yet filed it with the tax return, generally must apply these new procedures. Taxpayers filing automatic method changes after May 9, 2018, should review Rev. Proc. 2018-31 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.
For more information, contact:
Partner, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 861 4140
Managing Director, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 521 1523
Manager, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 521 1555
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein.
Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.