February 7, 2022
2022-0222 IRS updates list of automatic accounting method changes In Revenue Procedure 2022-14, the IRS updates the list of automatic method changes. Revenue Procedure 2022-14 makes numerous changes to existing automatic change guidance. Significant changes to prior automatic accounting method procedures in Revenue Procedure 2019-43 Revenue Procedure 2022-14 | Summary of changes from prior guidance | Section 6.21 — Changes in depreciation as a result of applying the additional first year depreciation regulations | Requires taxpayers to file an amended federal income tax return, or administrative adjustment request (AAR), as applicable, to change from the impermissible method of determining depreciation to the permissible method of determining depreciation for one-year property or one-year plants before the date they file their federal income tax return for the tax year succeeding the one-year property's placed-in-service year or the one-year plant's planting or grafting year, as applicable. Allows taxpayers to change from the impermissible method of determining depreciation to the permissible method of determining depreciation for one-year property or one-year plants by filing an amended federal income tax return, or AAR, as applicable, in accordance with Section 4.03(4)(a) of Revenue Procedure 2020-50, if the one-year property or one-year plant is within the scope of Section 4.03 of Revenue Procedure 2020-50, as modified by Section 6.21(1)(b) of Revenue Procedure 2022-14. | Section 6.22 — Depreciation of tangible property under IRC Section 168(g) by controlled foreign corporations | Requires an IRC Section 481(a) adjustment (or component of an IRC Section 481(a) adjustment) that results from a change under Section 6.22 and shares the same characteristics as any other IRC Section 481(a) adjustment (or component) from a change under Section 6.22 to be combined into a single IRC Section 481(a) adjustment on Form 3115. Requires an IRC Section 481(a) adjustment (or component) from a change under Section 6.22 that does not share all of the same characteristics as any other IRC Section 481(a) adjustment (or component) from a change under Section 6.22 to be included in Form 3115 as separate adjustments. | Section 12.01 — Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers | Applies Section 12.01 to a taxpayer that uses a historic absorption ratio (HAR) election with the simplified production method, the modified simplified production method, or the simplified resale method and wants to change to a different method for determining the additional IRC Section 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the tax year. | Section 12.02 — Certain uniform capitalization (UNICAP) methods used by producers and reseller-producers | Applies Section 12.02 to a taxpayer that uses an HAR election with the simplified production method or the modified simplified production method and wants to change to a different method for determining the additional IRC Section 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the tax year. | Section 13.01 — Change to accounting method to comply with IRC Section 267 | Applies Section 13.01 to a taxpayer that, by reason of the exception in Treas. Reg. Section 1.267(a)-3(c)(4), wants to change its accounting method for deducting amounts owed to a controlled foreign corporation (CFC) that does not have any US shareholders that own the CFC stock within the meaning of IRC Section 958(a). | Section 15.01 — Change in overall method from the cash method to an accrual method | Adds two new method changes, which cover a change made in the mandatory IRC Section 448 year under Treas. Reg. 1.448-2(g) (DCN 257) and a change for taxpayers subject to IRC Section 447 (DCN 258). | Section 15.10 — Specified transportation industry taxpayer that wants to change to the overall cash receipts and disbursement (cash) method | Requires a specified transportation industry taxpayer to have average annual gross receipts that exceed the inflation-adjusted amount in IRC Section 448(c)(4), but do not exceed $50 million. | Section 15.17 — Change to the overall cash method or to an accounting method in which a small-business taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method for computing all other items of income and expense | Applies the acceleration of an IRC Section 481(a) adjustment remaining on a prior overall change in accounting method to an accrual method, as provided in Section 15.17(7)(a) of Revenue Procedure 2022-14, to a taxpayer making a change described in Section 15.17(2)(a) or (b) of Revenue Procedure 2022-14. | Section 16.10 — Changes in the timing of income recognition under IRC Section 451(b) and (c) (formerly Section 16.12) | Prohibits a taxpayer making a change to the full inclusion method under Prop. Reg. Section 1.451-8(a) from making the change on a cut-off basis. Modifies paragraph 16.10(5) to disregard a change made under Section 16.10(2)(a)(iii)(A), (B), (F) or (G), Section 16.10(2)(a)(iv)(A), (B), (C), (G) or (H), or Section 16.10(2)(b)(ii)(A), (B) or (F) for purposes of Section 5.01(1)(f) of Revenue Procedure 2015-13 if (i) the change is made for the taxpayer's early application year or the taxpayer does not apply Treas. Reg. Section 1.451-3 or Treas. Reg. Section 1.451-8 for a tax year beginning before January 1, 2021, for the taxpayer's first tax year beginning on or after January 1, 2021, and (ii) the IRC Section 481(a) adjustment required to implement the change is zero. Adds an example on how the five-year item-eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13 applies to changes made under Section 16.10. Clarifies the situations in which changes to the cost-offset related-inventory method in Sections 16.10(2)(a)(iii)(E), 16.10(2)(a)(iv)(F) and 16.10(2)(b)(ii)(E) apply. Clarifies the ordering of concurrent cost-offset and cost-offset related inventory method changes. | Section 20.01 — Taxpayer changing its timing of incurring liabilities for employee compensation | Clarifies paragraph (1) does not include any amounts for medical services that are deferred compensation under IRC Section 404. Adds new paragraph (4), which allows a taxpayer using an overall accrual method of accounting to change its method for taking into account certain employee commission liabilities. | Section 22.18 — A small-business taxpayer changing its IRC Section 471 accounting method for inventory | Adds paragraph 22.18(5)(c), which disregards a change made under Section 22.18(1)(b) of Revenue Procedure 2022-14 for purposes of Section 5.01(1)(f) of Revenue Procedure 2015-13 if (i) the change is made for the taxpayer's early application year or, for a taxpayer that does not apply Treas. Reg. Section 1.471-1(b) for a tax year beginning before January 5, 2021, for the taxpayer's first tax year beginning on or after January 5, 2021, and (ii) the IRC Section 481(a) adjustment required to implement the change is zero. | Section 26.04 — Change in basis of computing reserves under IRC Section 807(f) | Modifies paragraphs (2)(a) and (b) to clarify the manner in which a nonlife insurance company implements a change in basis when computing life insurance reserves to require the netting of IRC Section 481(a) adjustments at the level of each item referenced in IRC Section 807(c). Establishes that a taxpayer that was an insurance company for the year of change does not accelerate an IRC Section 481(a) adjustment because it changes from a life insurance company to a nonlife insurance company or vice versa. |
Addition of certain limitations Revenue Procedure 2022-14 modifies the following sections in the list of automatic method changes to add certain limitations: - Section 7.01 — Change in accounting method for the treatment of research and experimental expenditures under IRC Section 174 as in effect before the Tax Cuts and Jobs Act (TCJA): Clarifies that Section 7.01 does not apply to any amount paid or incurred in any tax year for which IRC Section 174, as amended by Section 13206 of the TCJA, is in effect (under current law, this applies to tax years beginning after December 31, 2021)
- Section 9.01 — Change in accounting method for the costs of computer software to a method described in Revenue Procedure 2000-50, 2000-2 C.B. 601, as modified by Revenue Procedure 2007-16, 2007-1 C.B. 358: Establishes that Section 5 of Revenue Procedure 2000-50 (costs of developing computer software) does not apply to any amount paid or incurred in any tax year for which IRC Section 174, as amended by the TCJA, is in effect
- Section 12.14 — Interest capitalization: Establishes that Section 12.14 does not apply to a taxpayer that wants to change its accounting method for interest from either capitalizing interest to not capitalizing interest or not capitalizing interest to capitalizing interest for improvements that involve the associated property rules in Treas. Reg. Section 1.263A-11(e)(1)(ii)(B)
Removal or clarification of certain obsolete language Revenue Procedure 2022-14 modifies the following list of automatic changes to either clarify or remove language on temporary rules because the window of time for the temporary rule has passed and the language is therefore obsolete: - Section 6.01 — Impermissible to permissible depreciation method changes: Removes language allowing a Form 3115 to be filed under Section 6.01 for certain changes described in Section 6.04, 6.05 or 6.19 if the original Form 3115 was filed between specific dates
- Section 6.18 — Late elections or revocation of elections under IRC Section 168(k)(5), (7) and (10): Clarifies the waiver of the eligibility rules in Sections 5.01(1)(d) (year of change that is not the final year of the trade or business) and 5.01(1)(f) ("five-year rule" precluding the same method change for the same item in a five-year window) of Revenue Procedure 2015-13 applies for the taxpayer's first, second or third tax year succeeding the taxpayer's tax year beginning in 2016 or 2017 and ending on or after September 28, 2017
- Section 6.19 — Changes for qualified improvement property placed in service after December 31, 2017: Removes language providing a temporary waiver of eligibility rules in Section 5.01(d) and (f) of Revenue Procedure 2015-13
- Section 6.20 — Certain late elections or revocations of elections under IRC Sections 168 and 1502: Removes language requiring the change to be made for a tax year for which the taxpayer timely files an original federal income tax return between specified dates and language providing a temporary waiver of eligibility rules in Sections 5.01(d) and (f) of Revenue Procedure 2015-13
- Section 6.21 — Changes in depreciation as a result of applying the additional first-year depreciation regulations: Removes language providing a temporary waiver of eligibility rules in Section 5.01(f) of Revenue Procedure 2015-13
- Section 12.01 — Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers: Removes the HAR transition rule because it is obsolete
- Section 12.02 — Certain uniform capitalization (UNICAP) methods used by producers and reseller-producers: Removes the HAR transition rule because it is obsolete
- Section 20.12 — An accrual method taxpayer changing its treatment of ratable service contracts to conform to the safe harbor method provided by Revenue Procedure 2015-39: Removes language temporarily waiving eligibility rules in Section 5.01(f) of Revenue Procedure 2015-13
- Section 26.04 — Change in basis of computing reserves under IRC Section 807(f): Removes paragraph (2)(d)(i), relating to the information required to be furnished with a taxpayer's return or on Form 3115, because Treas. Reg. Section 1.801- 5(c) has been removed by T.D. 9911
Changes to other existing automatic change guidance In addition to amplifying and modifying Revenue Procedure 2019-43, Revenue Procedure 2022-14 also modifies several other revenue procedures and rulings (previously issued as stand-alone guidance) on automatic method changes. These include the following: - Revenue Procedure 2011-46, book safe harbor under the nonaccrual-experience method: Clarifies that the statement filed in lieu of a Form 3115 is considered a Form 3115 for purposes of the automatic method change procedures of Revenue Procedure 2015-13 and waives the duplicate filing requirement
- Revenue Procedure 2007-48, safe harbor treatment of rotable spare parts: Establishes that the automatic procedures in Section 22.08 of Revenue Procedure 2022-14 should be followed, subject to procedural eligibility requirements, with the exception of Section 5.01(1)(f) (five-year rule) of Revenue Procedure 2015-13
- Revenue Ruling 2004-62, business expenses pertaining to post-establishment fertilization of timber stand: Establishes that the automatic procedures in Section 3.04 of Revenue Procedure 2022-14 should be followed, subject to procedural eligibility requirements
- Revenue Ruling 2000-7, permitting taxpayers to recovery missed depreciation for eligible disposed assets: Establishes that the automatic procedures in Section 11.03 of Revenue Procedure 2022-14 should be followed, subject to procedural eligibility requirements with the exception of Section 5.01(1)(f) (five-year rule) of Revenue Procedure 2015-13
Effective date Revenue Procedure 2022-14 is effective for Forms 3115 that are filed (i) on or after January 31, 2022, for a year of change ending on or after the last day of the eighth month preceding January 31, 2022, and (ii) under the automatic change procedures of Revenue Procedure 2015-13. Revenue Procedure 2022-14 has transition rules for Forms 3115 filed under the non-automatic change procedures in Revenue Procedure 2015-13. Under those rules, a taxpayer that has a Form 3115 pending with the National Office on January 31, 2021, may choose to make the accounting method change under the automatic change procedures of Revenue Procedure 2015-13. The taxpayer must notify the National Office contact person for the Form 3115 that it intends to make the automatic accounting method change before the later of (i) March 2, 2022 or (ii) the issuance of a letter ruling granting or denying consent for the change. If the taxpayer timely notifies the National Office that it is converting the Form 3115 to the automatic change procedures in Revenue Procedure 2015-13, the National Office will send a letter to the taxpayer acknowledging its request and will return the user fee submitted with the Form 3115. The taxpayer must resubmit a Form 3115 that conforms to the automatic change procedures, with a copy of the letter from the National Office to the IRS in Ogden, UT, by the earlier of (i) the 30th calendar day after the date of the National Office's letter, or (ii) the date the taxpayer must file the duplicate of the Form 3115 under Section 6.03(1)(a)(i)(B) of Revenue Procedure 2015-13. For purposes of the eligibility rules in Section 5 of Revenue Procedure 2015-13, the IRS will consider the duplicate copy of the resubmitted Form 3115 as filed on the date the taxpayer originally filed the Form 3115 under the non-automatic change procedures. Revenue Procedure 2022-14 also has rules for Forms 3115 filed for accounting method changes that can no longer be made under the automatic change procedures and a transition rule for taxpayers that properly filed a duplicate copy of Form 3115 before January 31, 2022, for an accounting method change that still qualifies under the automatic change procedures. Implications The modification to Section 6.22 (on depreciation of tangible property by controlled foreign corporations) is a welcome departure from the IRC Section 481(a) requirements as originally set forth in Revenue Procedure 2021-26, which required the filer to provide a separate IRC Section 481(a) adjustment for each item of property. While taxpayers did not receive the ideal relief of a single net IRC Section 481(a) adjustment for all items of property included in the change, the revisions to Section 6.22 permitting the grouping of adjustments for assets with shared characteristics are intended to be less burdensome than the prior rule. While Revenue Procedure 2022-14 adds a limitation to Section 7.01, it unfortunately does not include method change guidance. A project remains in the Priority Guidance Plan (Guidance addressing amortization of research and experimental expenditures under IRC Section 174), so taxpayers may receive much-needed method-change guidance in the future. The revision establishing an automatic accounting method change for taxpayers that use an HAR election with the simplified production method, the modified simplified production method, or the simplified resale method and want to change to a different simplified method is taxpayer favorable. This change prevents taxpayers that use an HAR method from being unfairly burdened by having to use the non-automatic change procedures and pay a user fee, compared to taxpayers using non-HAR methods. The determination of whether a taxpayer has made an HAR election is still important, but no longer impacts the eligibility to use the automatic change procedures. Under Section 12.18, a change from a simplified method with HAR to the same simplified method without HAR constitutes revocation of an HAR election. In this case, Section 12.18 establishes that an automatic change is only available for the taxpayer's first, second, or third tax year ending on or after November 20, 2018. Under Section 6.10, accounting method changes in income recognition, changes to conform to the final IRC Section 451 regulations generally are automatic through 2021 tax years. Subsequent IRC Section 451 method changes, however, may not be automatic depending on the item (e.g., a change to the cost offset method) and may require a nonautomatic method change. Also, as an appropriate precaution, taxpayers should be mindful of ordering rules in the new automatic change procedure and confer with their advisers as appropriate. ——————————————— Contact Information
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