On May 5, 2016, the IRS released Revenue Procedure 2016-29, which updates the list of automatic consent accounting method changes.
The new guidance generally is effective for any Form 3115, “Application for Change in Accounting Method,” filed on or after May 5, 2016, for a tax year ending on or after Sept. 30, 2015. This guidance amplifies, modifies, and supersedes the automatic method change rules of Revenue Procedure 2015-14.
The new revenue procedure makes the following significant modifications to the list of automatic accounting method changes:
- The time period during which eligibility rules are relaxed for taxpayers electing to use the remodel-refresh safe harbor in Revenue Procedure 2015-56 is extended to include any Forms 3115 filed for tax years beginning after Dec. 31, 2013, and ending before Dec. 31, 2016.
- Any change from an impermissible to a permissible method of accounting for inventories under Internal Revenue Code Section 471 now can be filed under the automatic change procedures.
- The inapplicability of the eligibility rules for most of the tangible property regulation automatic consent changes is extended one year to include taxable years beginning before Jan. 1, 2016.
The new revenue procedure also adds the following to the list of automatic consent method changes:
- Changes to the characterization of expenses or year of startup for startup expenses capitalized under Internal Revenue Code Section 195
- Changes from either not capitalizing interest expense or capitalizing interest expense consistent with a taxpayer’s book method of accounting to capitalizing interest expense consistent with Internal Revenue Code Section 263A
- Changes in the retail inventory method of accounting from including to not including temporary price mark-ups and mark-downs in the calculation of retail selling price
Under the transition rules, taxpayers that filed an advance consent Form 3115 prior to May 5, 2016, for an accounting method change that is now designated as an automatic change are allowed to refile the Form 3115 as an automatic change without the user fee. To use the transition rules, a taxpayer must notify the designated IRS national office contact person before the later of June 6, 2016, or the issuance of a letter ruling granting or denying consent for the change. If the Form 3115 is converted to an automatic method change, the IRS national office will refund the advance consent filing fee.
In addition, the revenue procedure reclassifies the following changes from automatic to advance consent:
- A change in method of accounting for long-term contracts to the percentage-of-completion method must be made under the nonautomatic change procedures beginning on June 6, 2016. A business still can use the automatic change provisions by filing a duplicate copy of its Form 3115 with the IRS national office by June 5, 2016, even if the business’ 2015 tax return is not filed by that date.
- Typically a change to a method of accounting for depreciation expense and a change from capitalizing to deducting repair and maintenance costs can be made as automatic changes. Under the new revenue procedure, businesses are required to request advance consent if a federal tax credit was claimed on the property subject to the depreciation or capitalization method change. This change is effective immediately.
The general rules require advance consent method changes to be filed with the IRS national office by the last day of the tax year and automatic changes to be filed by the extended due date of the return. Absent any relief, many taxpayers would not be able to timely file a method change for a change reclassified from automatic to advance consent. As a result, the IRS is allowing reclassified advance consent changes to be filed by the extended due date of a taxpayer’s last tax year ending before May 5, 2016, or before June 6, 2016, for a change in method of accounting for long-term contracts to the percentage-of-completion method.