The IRS on Dec. 20, 2016, released Notice 2017-6 to extend specific eligibility rule waivers by an additional year for taxpayers seeking to file an automatic consent change in accounting method to comply with the tangible property regulations under Secs. 162(a) and 263(a) as well as certain automatic method changes related to the disposition regulations under Sec. 168. The waivers now extend to any tax year beginning before Jan. 1, 2017, and may provide welcome relief to taxpayers that remain in the process of transitioning their historical methods over to the new methods required under the regulations.
In general, the automatic change procedures contain a rule that precludes a taxpayer from filing an automatic Form 3115, Application for Change in Accounting Method,to change the treatment of the same item more than once within a five-year period. Another rule precludes a taxpayer from filing an automatic method change if the year of change is the taxpayer's final year of its trade or business.
Before the issuance of Notice 2017-6, taxpayers could file certain automatic method changes to implement the regulations with the prior five-year same-item eligibility rule or the final year of the trade or business eligibility rule waived for any tax year beginning before Jan. 1, 2016. To ease taxpayers' transition to the regulations, Notice 2017-6 provides an additional one-year extension of the eligibility rule waivers to reduce the administrative burden that would otherwise result from requiring taxpayers to file advance consent (or nonautomatic) method change(s) to comply with the regulations.
The final tangible property regulations were issued in 2013 and addressed a variety of issues, including the treatment of costs to acquire, produce, repair, or improve tangible property under Regs. Secs. 1.162-3, 1.162-4, 1.168(i)-1, 1.168(i)-7, 1.168(i)-8, 1.263(a)-1, 1.263(a)-2, and 1.263(a)-3 (T.D. 9636). Subsequently in 2014, the IRS and Treasury published final regulations addressing the depreciation and disposition of property under Regs. Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 (T.D. 9689). Generally, these regulations were effective for tax years beginning on or after Jan. 1, 2014. As a result of these regulations, many taxpayers filed at least one Form 3115 to change their historical tax accounting methods to comply with the new standards for their 2014 or 2015 tax year.
Currently, the applicable guidance for filing a Form 3115 is provided in Rev. Proc. 2015-13, which sets forth procedures for taxpayers to make method changes under the automatic consent provisions as well as advance consent provisions. Automatic consent method changes typically are easier to implement from an administrative and procedural standpoint and do not require a separate filing fee. To qualify for the automatic consent procedures, taxpayers must (1) confirm that the specific method change they seek to make is listed as an automatic change under Rev. Proc. 2016-29 (which presently includes numerous changes related to the regulations), and (2) ensure that they are eligible to make an automatic change by reviewing the various eligibility rules set forth under Section 5 of Rev. Proc. 2015-13.
Specific eligibility rule waivers under Notice 2017-6
Given the broad scope of the regulations and the numerous administrative considerations associated with implementing the regulations, many taxpayers today continue to file method changes for their current tax year to comply with the new rules and standards. In certain instances, taxpayers that previously filed a method change for their 2014 or 2015 tax year may be in the position of having to file a subsequent change for the 2016 year to refine or modify the same item (e.g., a unit of property) addressed in the previously filed method change.
As noted above, the eligibility rule provided in Section 5.01(1)(f) of Rev. Proc. 2015-13 generally precludes taxpayers that have filed a method change in the prior five tax years (including the tax year of change) for a specific item from filing another method change for the same item under the automatic consent procedures. However, Notice 2017-6 waives this specific eligibility rule for any tax year beginning before Jan. 1, 2017, thereby allowing taxpayers who previously filed a method change for the same item in the prior years to make the subsequent method change under the automatic procedures. The waiver applies for the method changes described under the following sections of Rev. Proc. 2016-29:
- Section 6.14, relating to a change from a permissible to another permissible method of accounting for depreciation of MACRS property (automatic change No. 200);
- Section 6.15, relating to a change in method of accounting for dispositions of a building or structural component (automatic change No. 205);
- Section 6.16, relating to a change in method of accounting for dispositions of tangible depreciable assets (automatic change No. 206);
- Section 6.17, relating to a change in method of accounting for dispositions of tangible depreciable assets in a general asset account (automatic change No. 207); and
- Section 11.08, relating to changes in methods of accounting for tangible property under the final tangible property regulations (automatic changes No. 184 through No. 193).
The notice also extends the waiver for the eligibility rule under Section 5.01(1)(d) of Rev. Proc. 2015-13 for changes made under Section 11.08 of Rev. Proc. 2016-29. This particular eligibility rule generally precludes taxpayers in the final year of their trade or business from filing an automatic method change. Thus, the waiver of this rule will allow any taxpayer seeking to file automatic changes No. 184 through No. 193 in the final year of its trade or business to do so, provided that the final year of the trade or business begins before Jan. 1, 2017.
As discussed above, Notice 2017-6 may be helpful to taxpayers that filed method changes to comply with the regulations within the past five years and need to make a subsequent method change relating to the same item for tax years beginning on or after Jan. 1, 2016. Particular situations that may require filing a subsequent method change include taxpayers that filed a method change in prior years but failed to properly or fully implement the new method. For instance, assume that a taxpayer filed a Form 3115 for its 2014 tax year to change from capitalizing all costs properly deductible as repair expenditures under Secs. 162 and 263(a) to deducting those costs in the year incurred.
Then, assume that the taxpayer, while in the process of preparing its 2016 return, discovers some capitalized costs that should have been deducted as part of the method change but were inadvertently missed. If the taxpayer intended to include all properly deductible repair costs in the original Form 3115 and described the item being changed to include all those costs, the IRS may consider the capitalized costs to be part of the same item for which the taxpayer filed the previous method change, even if the tax treatment of those costs differs from the remaining items included in the change. Thus, if the taxpayer desires to deduct the remaining capitalized costs, it must file another method change for the 2016 tax year to change to the correct method of deducting the amounts in the year incurred. In this fact pattern, a taxpayer may now file this second automatic Form 3115 specifically addressing the treatment of certain repair costs under the automatic change procedures, rather than being required to file a nonautomatic Form 3115.
Additionally, Notice 2017-6 provides a transition rule for any nonautomatic method changes filed before Dec. 20, 2016, requesting consent for any of the changes in methods of accounting covered by the notice. If the method change is pending with the IRS National Office, a taxpayer may choose to make the change under the automatic consent procedures in Rev. Proc. 2015-13.
Kevin Anderson is a partner, National Tax Office, with BDO USA LLP in Washington.
For additional information about these items, contact Mr. Anderson at 202-644-5413 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.