IRS issues new automatic method changes for certain small taxpayer provisions

Tax Hot Topics newsletterThe IRS has issued Revenue Procedure 2018-40, which provides four new automatic method changes with favorable Section 481(a) adjustment options for small taxpayers with aggregate, average annual gross receipts of $25 million or less as defined in Section 448(c). 

These changes were anticipated as they are necessary to implement the statutory changes for small taxpayers made by the Tax Cuts and Jobs Act (TCJA). This procedure modifies and amplifies the current comprehensive list of automatic method changes as found in Rev. Proc. 2018-31.
The Rev. Proc. adds the following method changes for any taxable year beginning after Dec. 31, 2017:

Automatic method changes for certain small taxpayer provisions

The overall cash method change waives the eligibility rule in Section 5.01(1)(e) of Rev. Proc. 2015-13, which states that a taxpayer is not allowed to change the overall method of accounting if it has done so in the prior five taxable years. The inventory, uniform capitalization and long-term contract changes waive the eligibility rule in Section 5.01(1)(f) of Rev. Proc. 2015-13, which disallows a taxpayer from filing a method change for the same item if that item has previously been changed in the prior five taxable years. 

Taxpayers who previously filed a method change relating to one of these items and are still taking into account the Section 481(a) adjustment may choose to either continue tracking the prior adjustment separately or net the remaining prior Section 481(a) and current Section 481(a) adjustments. The method changes described in Section 19.01 of Rev. Proc. 2018-40 are required to be made on a cut-off method, thus no Section 481(a) adjustment is required or allowed.

All four method changes have reduced filing requirements, lessening the overall burden of completing the Form 3115. There is also a transition rule for taxpayers who filed a Form 3115 before Aug. 3, 2018, under the non-automatic procedures in Rev. Proc. 2015-13 to convert the request to a change under the new automatic procedure.

Contact Sharon Kay
Partner, Accounting Methods
Washington National Tax Office
T +1 202 861 4140

John Suttora
Managing Director, Accounting Methods
Washington National Tax Office
T +1 202 521 1523

Caleb Cordonnier
Washington National Tax Office
T +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.