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The IRS has updated (Revenue Procedure 2019-43) a list of automatic accounting method changes, including accounting method changes for leasing transactions. Revenue Procedure 2019-43 amplifies and modifies Revenue Procedure 2018-31 (see Tax Alert 2018-1066).

Revenue Procedure 2019-43 modifies two sections of Revenue Procedure 2018-31 that relate to leasing transactions. Section 6.03 of Revenue Procedure 2018-31, which relates to accounting method changes for sale, lease and financing transactions, now allows taxpayers to make an automatic accounting method change, with an IRC Section 481 adjustment, under Revenue Procedure 2015-13's automatic change procedures for transactions entered before the beginning of the year of change. Revenue Procedure 2019-43 requires taxpayers to attach a statement with the name of the counterparty, instead of the counterparty representation, to Form 3115. Revenue Procedure 2019-43 also modifies Section 6.03 to allow the audit protection rules of Section 8 of Revenue Procedure 2015-13 to apply. Those rules, however, will not apply to the characterization of any transaction as a lease, sale or financing transaction.

Section 6.08 of Revenue Procedure 2018-31, which relates to accounting method changes for tenant construction allowances, now allows taxpayers to make an automatic accounting method change, with an IRC Section 481 adjustment, for an existing lease under Revenue Procedure 2015-13. Like the change under Section 6.03, taxpayers will have to attach a statement with the counterparty's name, instead of the counterparty representation, to the Form 3115. The audit protection rules in Section 8 of Revenue Procedure 2015-13 will apply, but protection will not be "provided on whether the taxpayer has, or does not have, a depreciable interest in the property subject to the tenant construction allowances for federal income tax purposes."

Implications

Since the recent changes to leases for financial reporting purposes under US GAAP, taxpayers have asked the IRS to relax its requirements for automatic leasing changes. Historically, obtaining a representation from the counterparty has been difficult and costly, and taxpayers generally used the cut-off automatic change procedures for these method changes or, because of the lack of audit protection, elected to not implement a change. These modifications are taxpayer-favorable and likely to elicit an increase in filings for these types of method changes.

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