Tax Accounting
On January 10, 2011, the IRS released Rev. Proc. 2011-14, which provides the exclusive procedures for taxpayers to obtain automatic consent for a change in method of accounting. Generally effective immediately, Rev. Proc. 2011-14 amplifies, clarifies, modifies, and supersedes Rev. Proc. 2008-52, the previous exclusive revenue procedure for all automatic consent accounting method changes, and Rev. Proc. 2009-39, which updated Rev. Proc. 2008-52. The most significant aspects of Rev. Proc. 2011-14 are the addition of three new automatic method changes and numerous changes to existing procedural rules for filing changes in methods of accounting.
Background
Sec. 446(e) provides that a taxpayer must secure IRS consent before changing a method of accounting for federal income tax purposes. To obtain consent, a taxpayer must file a Form 3115, Application for Change in Accounting Method, under either the automatic or nonautomatic consent procedures. In general, a taxpayer that qualifies to use the automatic consent procedures must file a Form 3115 under the timely duplicate filing requirements; that is, the original Form 3115 must be attached to the taxpayer’s timely filed (including extensions) federal income tax return for the year of change, and a copy of the Form 3115 must be filed with the IRS National Office no earlier than the first day of the year of change and no later than the filing date of that return. If a method change is not specifically identified as an automatic consent change, the taxpayer is required to file a Form 3115 under Rev. Proc. 97-27. A nonautomatic Form 3115 must be filed with the IRS National Office on or before the last day of the year of change.
New Automatic Method Changes
Rev. Proc. 2011-14 introduces the following three new automatic method changes:
- Deduction for energy-efficient commercial buildings under Sec. 179D: This change permits a taxpayer to change its method of accounting to deduct under Sec. 179D amounts paid or incurred for the installation of energy-efficient commercial building property.
- Change in applicable financial statements for advance payments: This change applies to a taxpayer that uses the one-year deferral method of Rev. Proc. 2004-34 to include advance payments in gross income in accordance with its applicable financial statements and that changes the manner in which advance payments are recognized in revenue for financial reporting purposes. If the taxpayer wants to change its tax method of accounting to use its new book method of recognizing advance payments in revenues to determine the extent to which advance payments are included in gross income under Rev. Proc. 2004-34, it must request IRS consent by attaching a detailed statement, in lieu of a Form 3115, to its original return for the year of change. (See discussion on p. 309.)
- California franchise taxes: This change applies to a taxpayer that wants to change its method of accounting for California franchise taxes to a method consistent with Rev. Rul. 2003-90.
Modifications and Clarification of Automatic Changes
Rev. Proc. 2011-14 modifies the procedures for specific automatic changes. The following list highlights some of the more significant developments:
- Repair and maintenance costs: The additional copy of Form 3115 that is required to be mailed to the IRS office in Ogden, Utah, must now be sent no later than the date the taxpayer files the original Form 3115 with its federal tax return (including extensions) for the year of change.
- Timing of incurring liabilities for bonuses: Taxpayers are now permitted to automatically change to a proper method of deducting bonuses when fixed and determinable by year end, whether or not the bonus is paid within 2½ months after the tax year in which the related services are provided.
- Change from overall cash to accrual method: Taxpayers that are currently using an accrual method to account for inventories and the cash method for all other items of income and expense (i.e., an overall hybrid method) are no longer precluded from filing an automatic change to the overall accrual method.
- Sale, lease, or financing transactions: The IRS will now consider requests to change a method of accounting for an existing transaction (which is required to be filed under the nonautomatic procedures) only if the proposed method is consistent with the method used by the counterparty to the agreement and certain information is submitted.
- Impermissible to permissible method of depreciation or amortization: Rev. Proc. 2011-14 clarifies that the amount of “depreciation allowable” for Sec. 168 property takes into account all additional first-year depreciation deduction provisions.
Modifications and Clarifications to Procedural Rules
Finally, the new revenue procedure modifies and clarifies general procedural rules for filing method changes. The following are some of the more significant developments:
- Filing requirements: For administrative reasons, Rev. Proc. 2011-14 modifies the duplicate filing requirement to require a copy of the Form 3115 be provided to the IRS office in Ogden, Utah, in lieu of providing the copy to the IRS National Office, for the computer software expenditures automatic method change and the vast majority of all depreciation automatic method changes.
- Concurrent changes: For administrative reasons, Rev. Proc. 2011-14 permits certain depreciation method changes to be made concurrently on a single Form 3115.
- 120-day window: If a taxpayer is within the 120-day window period, the 120-day window period ends when the IRS Appeals Office refers a case to the examining agent for reconsideration. The 120-day window will be available to the taxpayer in its entirety when the resumed examination ends.
- Issue under consideration: Rev. Proc. 2011-14 modifies the rules for a taxpayer with a method of accounting for an item that is an issue under consideration (1) before an IRS Appeals Office when Appeals submits a refund or credit to the Joint Committee on Taxation or (2) before a federal court when a settlement stipulation is submitted to the committee.
- Foreign partnerships and foreign divisions of domestic corporations: Additional terms and conditions have been added for method changes filed on behalf of such entities, including terms relating to the treatment of the Sec. 481(a) adjustment and maintenance of records and accounts.
Effective Date Rules
Rev. Proc. 2011-14 is generally effective for automatic consent applications filed on or after January 10, 2011, for a year of change ending on or after April 30, 2010. The revenue procedure is effective for nonautomatic consent applications filed under Rev. Proc. 97-27 on or after January 10, 2011, for a year of change ending on or after January 10, 2011.
EditorNotes
Kevin Anderson is a partner, National Tax Services, with BDO USA, LLP, in Bethesda, MD.
For additional information about these items, contact Mr. Anderson at (301) 634-0222 or kdanderson@bdo.com.
