Final rules for simplified accounting methods allow tax shelter annual election

The IRS issued final regulations adopting the simplified tax accounting rules in Secs. 263A, 448, 460, and 471 for small businesses (businesses with average annual gross receipts of $25 million or less) enacted by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The final regulations also update certain special accounting rules for long-term contracts under Sec. 460 for the repeal of the corporate alternative minimum tax in Sec. 55 and the addition of the base-erosion and anti-abuse tax in Sec. 59A by the TCJA.

The regulations (T.D. 9942) finalize proposed regulations issued in July (REG-132766-18) with changes in response to comments received by the IRS. The changes in the final regulations include:

• Making the syndicate election (the election to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate under Sec. 448(d)(3) for the current tax year) an annual election rather than a permanent election revocable with IRS consent;
• Removing the five-year restriction on making an automatic accounting method change when a taxpayer is required to change from the cash method as a result of Sec. 448(a)(3)or not meeting the Sec. 448 gross receipts test in a tax year but becoming eligible to use the cash method in a later year; and
• Excluding direct labor costs from inventory costs required to be included in inventory treated as nonincidental material or supplies.

The regulations are generally applicable Jan. 5, 2021, the date they were published in the Federal Register. However, a taxpayer may apply the regulations for a tax year beginning after Dec. 31, 2017, and before Jan. 5, 2021, provided that if the taxpayer applies any aspect of the final regulations under a particular Code provision, the taxpayer must follow all the applicable rules contained in the regulations that relate to that Code provision for the tax year and all subsequent tax years and must follow the administrative procedures for filing a change in accounting method in accordance with Regs. Sec. 1.446-1(e)(3)(ii).

Alternatively, under similar rules as those described above for retroactively applying the final regulations, a taxpayer may rely on the proposed regulations for a tax year beginning after Dec. 31, 2017, and before Jan. 5, 2021.