The IRS has issued guidance (Revenue Procedure 2022-9) for small businesses on obtaining automatic consent to change accounting methods to comply with the final regulations under IRC Sections 263A, 448, 460 and 471 (Final Regulations). Revenue Procedure 2022-9 also includes procedures for revoking an election under Prop. Reg. Section 1.448-2(b)(2)(i)(B) for tax years beginning on or after January 5, 2021. For more information on the Final Regulations, see Tax Alert 2021-0053.

Modifications to Section 12.01 of Revenue Procedure 2019-43 (inventory resellers)

Section 12.01 is modified to:

1. Add a new change allowing a former small business taxpayer to change from a permissible non-UNICAP method to a permissible UNICAP method in the first tax year that it does not qualify as a small business taxpayer
2. Update the definition of small business taxpayer to conform to the definition in current rules
3. Clarify that a taxpayer no longer qualifying to use the simplified resale method described in Treas. Reg. Section 1.263A-3(d)(3) must change to a permissible UNICAP method specifically described in the regulations
4. Clarify that Section 12.01 of Revenue Procedure 2019-43 does not apply to a taxpayer that wants to revoke its election under IRC Section 263A(d)(3) (not have IRC Section 263A apply to certain plants produced in a farming business)

The eligibility rule under Section 5.01(1)(f) of Revenue Procedure 2015-13 will not apply to a taxpayer changing to a permissible UNICAP method in the first tax year the taxpayer is not a small business taxpayer (the new change provided in Section 12.01(1)(a)(i) of Revenue Procedure 2019-43). For all other changes in Section 12.01, the eligibility rule under Section 5.01(1)(f) is waived only for a taxpayer's first, second or third tax year ending on or after November 20, 2018.

Consistent with current rules, a taxpayer changing its accounting method under revised Section 12.01(a)(a)(ii) or (iii) of Revenue Procedure 2019-43 (related to changes to and from the simplified resale method for a reseller's production and resale activities) must take any applicable net positive IRC Section 481(a) adjustment into account ratably over the same number of tax years the taxpayer used under its former accounting method (not to exceed four years). Taxpayers making any other change under Section 12.01 of Revenue Procedure 2019-43 (including a change to apply a permissible UNICAP method for the first tax year the taxpayer is not a small business taxpayer) must take any net positive IRC Section 481(a) adjustment for the change into account in accordance with Section 7.03 of Revenue Procedure 2015-13.

Modifications to Section 12.02 of Revenue Procedure 2019-43 (inventory producers)

Section 12.02 is modified to:

1. Add a change allowing a former small business taxpayer to change from a permissible non-UNICAP inventory capitalization method to a permissible UNICAP method in the first tax year that it does not qualify as a small business taxpayer
2. Update the definition of small busines taxpayer to conform to the definition in current rules

The eligibility rule under Section 5.01(1)(f) of Revenue Procedure 2015-13 will not apply to a taxpayer required to change to a permissible UNICAP method in the first tax year the taxpayer is not a small business taxpayer (the new change provided in Section 12.02(1)(a)(ii) of Revenue Procedure 2019-43). For all other changes in Section 12.02, the eligibility rule under Section 5.01(1)(f) is waived only for a taxpayer's first, second or third tax year ending on or after November 20, 2018.

Modifications to Section 12.08 of Revenue Procedure 2019-43 (self-constructed assets)

Section 12.08 is modified to update references to "producer" or "reseller-producer" to conform to new cites in Sections 12.01 and 12.02 from changes described previously.

Change to no longer capitalize costs for small business taxpayers

Section 12.16 of Revenue Procedure 2019-43 is modified to allow a taxpayer to no longer apply IRC Section 263A, including for self-constructed assets, using the rules in Prop. Reg. Section 1.263A-1(j) or Treas. Reg. Section 1.263A-1(j) (depending on the year of change).

If the taxpayer changed to capitalize costs within five tax years, ending with the year of change, and the change was made in the first tax year that the taxpayer did not qualify as a small business taxpayer, that change is disregarded for purposes of the eligibility rule under Section 5.01(f) of Revenue Procedure 2015-13. The eligibility rule does not apply for the taxpayer's first, second or third tax year beginning after December 31, 2017. In addition, the eligibility rule will not apply for the taxpayer's first tax year beginning on or after January 5, 2021 (if the Final Regulations are not adopted early).

Taxpayers must accelerate the remaining portion of a positive IRC Section 481(a) adjustment from a prior IRC Section 263A change in the year of change (removing the option to continue the general recognition period provided in Revenue Procedure 2018-40). The reduced filing requirements introduced through Revenue Procedure 2018-40 are retained and taxpayers generally may file concurrent automatic changes to apply other rules for small business taxpayers on the same Form 3115.

Change in overall method from cash method to accrual method

A taxpayer may change from the cash method to an accrual method under Section 15.01 of Revenue Procedure 2019-43. This change applies to:

1. A taxpayer that must make the change under IRC Section 448, any other Code section or regulations, or other guidance published in the Internal Revenue Bulletin
2. A taxpayer that wants to make the change but is not required to make the change under IRC Section 448, any other Code section or regulations, or other guidance published in the Internal Revenue Bulletin.

Taxpayers also may make a change under Section 15.01 if they:

1. Are prohibited from using the overall cash method under IRC Section 448
2. Are prohibited from using the overall cash method under IRC Section 447

or

In addition, taxpayers may qualify to use Section 15.01 when they have used a permissible inventory method in the tax year immediately preceding the year of change, and, if they were subject to IRC Section 263A for that year, have used a permissible IRC Section 263A method for that year and continue to use the method for the year of change.

Taxpayers making this change must calculate an IRC Section 481(a) adjustment that reflects the account receivables, account payables, inventory and other items necessary for preventing items from being duplicated or omitted. Section 15.01 includes IRC Section 481(a) adjustment rules for certain S corporation revocations and specified credit card fees.

Taxpayers may generally make concurrent changes on one Form 3115. The eligibility rule under Section 5.01(1)(f) of Revenue Procedure 2015-13 is disregarded for prior changes to the cash method. The eligibility rule also does not apply to the taxpayer's first, second or third tax year beginning after December 31, 2017 (provided the tax year begins before January 1, 2021), if the taxpayer has an applicable financial statement (AFS) and changes to an overall accrual method under Section 15.01 that complies with IRC Section 451(b)(1), and, if applicable, IRC Section 451(b)(4), or Prop. Reg. Section 1.451-3. It also does not apply for taxpayers that have an AFS and change to an overall accrual method under Section 15.01 that complies with Treas. Reg. Section 1.451-3 for a tax year beginning after January 1, 2021. In addition, the eligibility rule does not apply to a taxpayer that has an AFS and does not apply Treas. Reg. Section 1.451-3 for a tax year beginning before January 1, 2021, and changes to an overall accrual method under Section 15.01 that complies with Treas. Reg. Section 1.451-3 for the first tax year that begins on or after January 1, 2021.

Change in overall cash method or another method used by a small business taxpayer

A small business taxpayer may change from an overall accrual accounting method to the overall cash method for a trade or business if it is not otherwise prohibited from using the overall cash method or required to use another overall accounting method. A small business taxpayer also may change from an overall accrual accounting method or an overall cash accounting method for a trade or business to an accrual method for purchases and sales of inventories and the cash method for calculating all other items of income and expense. The small business taxpayer, however, must not otherwise be prohibited from using the cash method under IRC Section 448 or required to use another overall method of accounting.

The eligibility rule under Section 5.01(1)(f) of Revenue Procedure 2015-13 is disregarded for prior changes to the overall accrual method. The eligibility rule also does not apply to the taxpayer's first, second or third tax year beginning after December 31, 2017. Additionally, it does not apply to a taxpayer's early application year or taxpayer's first tax year beginning on or after January 5, 2021, if the taxpayer does not apply Treas. Reg. Section 1.448-2 in the early application year.

Small business taxpayers must take the remaining portion of an IRC Section 481(a) adjustment from a prior overall change in accounting method to an accrual method into account in the year of change. They may make all concurrent changes on one Form 3115.

Changes from IRC Section 471 inventory methods

Section 22.19 of Revenue Procedure 2019-43 is modified so that a small business taxpayer can change to:

1. One of the methods under IRC Section 471(c) or Prop. Reg. Section 1.471-1(b) for tax years beginning before January 5, 2021

or

Reduced Form 3115 filing requirements are retained but taxpayers must take the remaining portion of a positive IRC Section 481(a) adjustment from a prior inventory change in the year of change. In addition, streamlined procedures are available if the taxpayer is making a change to comply with Treas. Reg. Section 1.471-1(b) and the IRC Section 481(a) adjustment for the change is zero. Under those procedures, a Form 3115 would not be required.

Prior method changes to comply with the IRC Section 471 inventory rules are generally disregarded for purposes of the eligibility rule under Section 5.01(1)(f). The eligibility rule does not apply for a taxpayer's first, second or third tax year beginning after December 31, 2017. Additionally, the eligibility rule does not apply to taxpayer's first tax year beginning on or after January 5, 2021 (if taxpayer did not early adopt the Final Regulations).

In general, taxpayers may make concurrent automatic method changes to apply other small business taxpayer rules on one Form 3115.

Changes within IRC Section 471(c)

Revenue Procedure 2022-9 adds new Section 22.20 to Revenue Procedure 2019-43, allowing:

1. A small business taxpayer that treats its inventory as non-incidental materials and supplies (NIMS) under IRC Section 471(c)(1)(B)(i) to change from one permissible identification/valuation method to another permissible identification/valuation method, for a tax year beginning before January 5, 2021
2. A small business taxpayer that uses the IRC Section 471(c) NIMS inventory method under Treas. Reg. Section 1.471-1(b)(4) to change to a method in Treas. Reg. Section 1.471-1(b)(4)(ii) or (iii) (i.e., certain changes in identification/valuation of inventories and allocation of inventory costs)

or

The eligibility rule under Section 5.01(1)(f) does not apply to a change described in Section 22.20(1)(c) or 22.20(1)(d) of Revenue Procedure 2019-43 (i.e., the changes that relate to how the taxpayer accounts for inventory in its AFS or books and records).

Taxpayers changing their accounting method under Section 22.20(1)(c) or 22.20(1)(d) of Revenue Procedure 2019-43 must take any applicable net positive IRC Section 481(a) adjustment for the change into account ratably over the same number of tax years the taxpayers used under their former accounting method (not to exceed four). In addition, the remaining portion of an IRC Section 481(a) adjustment from a prior change made under Section 22.20(1)(c) or 22.20(1)(d) must be taken into account in the year of change.

Taxpayers changing to one of the methods in Section 22.20 have a reduced filing requirement and may make concurrent changes on one Form 3115.

Change to apply IRC Section 471

Revenue Procedure 2022-9 adds new Section 22.21 to Revenue Procedure 2019-43, allowing a taxpayer to change from using a small inventory taxpayer inventory method under Proposed Reg. Section 1.471-1(b)(4), (5), or (6), or Treas. Reg. Section 1.471-1(b)(4), (5) or (6) to accounting for inventory under IRC Section 471(a) and Treas. Reg. Section 1.471-1(a).

The eligibility rule under Section 5.01(1)(f) does not apply to the change described above if the change is made in the first tax year the taxpayer is not a small business taxpayer.

Consistent with the other changes above, a taxpayer may file this change and other small business taxpayer related changes on the same Form 3115.

Revocation of election under Prop. Reg. Section 1.448-2(b)(2)(iii)(B)

Under Proposed Reg. Section 1.448-2(b)(2)(iii)(B), a taxpayer may elect to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate for purposes of IRC Section 448(d)(3) for the current tax year. Revenue Procedure 2022-9 establishes that the Commissioner will grant a taxpayer consent to revoke its election under Prop. Reg. Section 1.448-2(b)(2)(iii)(B) if the taxpayer revokes the election in the time and manner described in Section 5.02(2) or (3) of Revenue Procedure 2022-9. For tax years beginning on or after January 5, 2021, however, the taxpayer's election under Prop. Reg. Section 1.448-2(b)(2)(iii)(B) is automatically revoked. As of the taxpayer's first tax year beginning on or after January 5, 2021, the taxpayer will be required to apply Treas. Reg. Section 1.448-2 and make the election as set out in Treas. Reg. Section 1.448-2(b)(2)(iii)(B)(2).

Revenue Procedure 2022-9 also states that the Commissioner grants deemed consent for a taxpayer to revoke its election under Prop. Reg. Section 1.448- 2(b)(2)(iii)(B) for tax years beginning after December 31, 2017, and before January 5, 2021, provided the taxpayer uses one of the procedures in Section 5.02(3) of Revenue Procedure 2022-9 to indicate that its applying Treas. Reg. Section 1.448-2 to those tax years.

Other changes

Revenue Procedure 2022-9 makes the following additional changes to Revenue Procedure 2019-43:

1. Requires one Form 3115 for an automatic change to, from, or within a nonaccrual experience (NAE) method of accounting under Section 15.04 and an automatic change to an overall accrual method under Section 15.01
2. Requires one Form 3115 for an automatic change to, from or within an NAE method of accounting under Section 15.04 and a required change to an overall accrual method under IRC Section 448 for the taxpayer's first IRC Section 448 year, when the taxpayer:
1. Is not eligible to make the change to an overall accrual method under Section 15.01

or

Additionally, Revenue Procedure 2022-9 removes Section 3.04 from Revenue Procedure 2018-40 and, for a non-automatic Form 3115 pending at the IRS national office on December 16, 2021, provides a transition rule allowing a taxpayer to make the change under the automatic change provisions if the taxpayer otherwise qualifies and notified the national office as instructed.

Implications

Revenue Procedure 2022-9 provides the procedures under which taxpayers may receive automatic consent to change their methods of accounting to comply with the Final Regulations. Allowing taxpayers to obtain automatic consent, waiving certain scope limitations in Revenue Procedure 2015-13 (such as the "five-year" eligibility rule), providing reduced or no filing requirements, and allowing taxpayers to transition previously filed non-automatic changes to automatic changes for the same year is consistent with the IRS's general intent to lessen the burden on taxpayers when complying with new rules. However, consistent with recently issued procedural guidance (e.g., Revenue Procedure 2021-34 for the final IRC Section 451 regulations), the IRS continues to:

1. Emphasize that compliance with final rules should occur in the effective year (e.g., under Revenue Procedure 2022-9, the five-year eligibility rule is generally reinstated for subsequent years)
2. Provide special terms and conditions to prevent benefits arising from changes made in close succession (e.g., generally requiring taxpayers to accelerate unrecognized positive IRC Section 481(a) adjustments from prior changes)

The new and modified automatic changes provide flexibility, in particular, for small business taxpayers with inventory. For years beginning before January 5, 2021 (the effective year for the Final Regulations), these taxpayers can change to employ non-IRC Section 471 methods described in the statute, proposed regulations or Final Regulations (the differences in those rules are discussed in the following Tax Alerts 2021-0053 and 2017-2131). To the extent a change to the non-IRC Section 471 methods described in the Final Regulations results in a zero IRC Section 481(a) adjustment, taxpayers can comply without filing a Form 3115 through the streamlined procedures. As a reminder, small business taxpayers changing to no longer apply the IRC Section 263A rules should consider changing to a non-IRC Section 471 method to avoid making tax adjustments to comply with the IRC Section 471 inventory rules.

Careful consideration should also be given to adoption of the provisions of IRC Section 451. Many taxpayers currently are looking at adopting the final IRC Section 451 regulations as part of their 2021 tax return.

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