IRS GUIDANCE ON CHANGES IN METHOD OF ACCOUNTING FOR DEPRECIABLE TANGIBLE PROPERTY

On February 28, 2014, the IRS issued Rev. Proc. 2014-17 detailing long anticipated guidance regarding certain changes in method of accounting for depreciable tangible property under the final, temporary, and proposed tangible property regulations. Rev. Proc. 2014-17 updates Rev. Proc. 2011-14 and supersedes prior guidance provided in Rev. Proc. 2012-20. The most significant changes made by Rev. Proc. 2014-17 include:

 

·         Adding the following elections to be treated as an automatic change in method of accounting:

o    Late partial disposition elections under the proposed rules;

o    Revocation of general asset account (GAA) elections under the temporary or proposed rules; and

o    Partial disposition elections of tangible depreciable assets to which IRS’s adjustment pertains under the proposed rules.

·          Modifying procedures for obtaining automatic consent of the IRS to change to methods of accounting provided for in the final, temporary, and proposed rules for:

o    Depreciation of leasehold improvements;

o    Permissible to permissible methods of accounting for depreciation of MACRS property;

o    Dispositions of tangible depreciable property; and

o    Late GAA elections or late elections to recognize gain or loss upon dispositions of certain assets in GAAs.

 

Scope Limitations

Automatic accounting method changes are generally not allowed in certain situations, such as when a taxpayer is under examination or when a taxpayer makes a change on the same item within the last five years. Rev. Proc. 2014-17 waives certain of these “scope limitations” that apply when a taxpayer changes an accounting method under its automatic procedures generally for any taxable year beginning on or after January 1, 2012, and beginning before January 1, 2014.

 

§481(a) Adjustments

An accounting method change generally causes a cumulative difference in items of income or expense between the current and proposed methods of accounting that may either be erroneously duplicated or omitted as of the beginning of the year of change. The typical mechanisms to transition from a prior accounting method to a new method is either by a §481(a) adjustment or the so-called “cut-off” approach.  For voluntary taxpayer initiated changes, the general rule is that taxpayers are allowed to spread a net positive §481(a) adjustment (increases to income) over four years and a net negative §481(a) adjustment (decreases to income) in one year (in year of change). Rev. Proc. 2014-17 contains these taxpayer friendly provisions, with some exceptions.

 

Decoupling of  § 263A UNICAP Rules

Under Rev. Proc. 2012-20, taxpayers were required to be in compliance with §263A uniform capitalization (UNICAP) rules before changing to a method under the repair regulations.  Taxpayers had the administrative burden and timing concerns of having to file for consent for a change to comply with UNICAP before they could request an automatic change. Rev. Proc. 2014-17 eliminated this prerequisite for requesting an automatic change under its procedures.