Automatic method change update covers Sections 174 and 451

On June 15, the IRS released Revenue Procedure 2023-24, which provides the annual update to the list of accounting method changes for which the automatic consent procedures apply. Revenue Procedure 2023-24 generally applies for any Form 3115, “Application for Change in Accounting Method,” filed on or after June 15, 2023, for a year of change ending on or after Oct. 31, 2022. While the updates are largely administrative in nature, aggregating previous guidance and removing obsolete language, there are helpful changes related to the Tax Cuts and Jobs Act of 2017 (TCJA) amendments to Section 174 and Section 451.

Nonautomatic (advance consent) method changes must be filed before the last day of the tax year, require IRS review and approval, and have a user fee for filing. However, automatic method changes generally can be filed by the due date of the income tax return of the year of change (including extensions) and are filed without a user fee, and, therefore, are less burdensome for taxpayers and the IRS.

Significant changes in Revenue Procedure 2023-24

The revenue procedure makes the following notable changes that provide welcome guidance for taxpayers related to the TCJA:

• Expands the applicability of method changes previously provided for in Revenue Procedure 2023-8 (as modified by Revenue Procedure 2023-11) related to adopting the required Section 174 method, or the method of capitalizing and amortizing Section 174 research and experimentation expenditures incurred after Dec. 31, 2021, as required under the TCJA.
  • Specifically, if taxpayers making the change to the required Section 174 method are presently capitalizing any Section 174 costs to inventoriable property or depreciable property, the scope of the method change now explicitly includes related changes to no longer capitalize such costs to inventoriable property or depreciable property.

Crowe observation

This favorable clarification provides broader applicability for the automatic change and allows taxpayers to avoid duplicating the capitalization of or the further deferral of Section 174 costs.

• Provides an additional year for making automatic method changes related to adoption of guidance under Treasury Regulation Sections 1.451-3 and 1.451-8, which relate to revenue recognition rules added under the TCJA.
  • Relaxed eligibility requirements related to filing a method change for the same item within a five-year period were extended, allowing more taxpayers to file automatic method changes for their 2022 taxable year end to comply with the final regulations.

Crowe observation

This update provides taxpayers that have filed prior method changes related to revenue recognition an additional year to file an automatic method change for the 2022 tax year if they haven’t properly implemented the prior change or need to modify their method of revenue recognition.

• Makes changes from an impermissible method of depreciation to a permissible method available for property in which a taxpayer previously had claimed a federal income tax credit, provided the change does not alter the computation of such tax credits.
  • This modification eliminates the prior requirement to file an advance consent change for a depreciation method change where a federal credit was claimed that affects the basis of the asset being changed.

Crowe observation

Now an advance consent method is required only if the method change impacts the credit computation.

• Creates transition rules for taxpayers that, before release of the updated notice, filed an advance consent Form 3115 for an accounting method change and that now are eligible to use the automatic change procedures under the updated revenue procedure. The transition rules allow taxpayers until the later of July 17, 2023, or the issuance of a letter ruling granting or denying consent, to convert the method change to the automatic change procedures.

Looking ahead

The updates to the annual automatic method change procedure provide opportunities to properly adopt the Section 174 rules implemented under the TCJA and give taxpayers an additional year to perfect changes made under Section 451. Taxpayers should consult their tax adviser to determine if they are affected by the changes within the revenue procedure, particularly if they are considering accounting method changes or have any in process.