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In Revenue Procedure 2023-24, the IRS updates the list of automatic method changes. Revenue Procedure 2023-24 makes numerous changes to existing automatic change guidance.

Significant changes to prior automatic accounting method procedures in Revenue Procedure 2022-14

Addition of certain limitations

Revenue Procedure 2023-24 modifies the following sections in the list of automatic method changes to add certain limitations:

• Section 6.01 — Impermissible to permissible method of accounting for depreciation or amortization: Clarifies that Section 6.01 does not apply to any property for which the taxpayer has claimed a federal income tax credit, unless the change does not alter the amount of the federal income tax credit
• Section 6.03 — Sale, lease, or financing transactions: Clarifies that a change made under Section 6.03 is made with an IRC Section 481(a) adjustment
• Section 15.08 — Change from the cash method to an accrual method for specific items: Includes a reference to the AFS income-inclusion rule under IRC Section 451(b)(1) and Treas. Reg. Section 1.451-3(b) in paragraph (2)(b) to make it consistent with Section 15.01(2)(b)
• Section 15.12 — Change to the overall cash method for farmers: (1) clarifies that this change only applies to the trade or business of farming for which the change is being made when a farmer is engaged in multiple farming trades or businesses, and (2) modifies Section 15.12(2)(a) to separate the citations to Treas. Reg. Sections 1.61-4(a) and 1.162-12 because Treas. Reg. Section 1.61-4(a) references cash-method rules for farmers in its entirety, but Treas. Reg. Section 1.162-12 only does so in part

Removal or clarification of certain obsolete language

Revenue Procedure 2023-24 removes the following sections included in Revenue Procedure 2022-14 because they are obsolete:

• Section 6.18 — Relating to late elections or revoking election under IRC Section 168(k)(5), (7) and (10)
• Section 12.18 — Relating to the revocation of a historic absorption ration election
• Section 16.06 — Relating to advance payments
• Section 16.09 — Relating to changes in timing of recognition of income due to the new standards

Revenue Procedure 2023-24 modifies the following list of automatic changes to remove language because it is obsolete:

• Section 6.21 (formerly Section 6.22 of Revenue Procedure 2022-14) — Depreciation of tangible property under IRC Section 168(g) by controlled foreign corporations: Removes paragraph (4), which allowed taxpayers to convert a Form 3115 filed under the non-automatic change procedures in Revenue Procedure 2015-13 to make the change described in Section 6.21 to a Form 3115 filed under the automatic change procedures under Section 6.21
• Section 12.01 — Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers: Removes (1) Section 12.01(2)(b), which allowed a temporary waiver of the eligibility rule in IRC Section 446 5.01(1)(f) of Revenue Procedure 2015-13, (2) Section 12.01(6), which included an audit protection exception in Section 8.02(1) of Revenue Procedure 2015-13, and (3) the reference to "early application year" in Section 12.01(2)(b)(iii)
• Section 12.02 — Certain UNICAP methods used by producers and reseller-producers: Removes (1) Section 12.02(4)(b), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13, (2) Section 12.02(5), which included an audit protection exception in Section 8.02(1) of Revenue Procedure 2015-13, and (3) the reference to "early application year" in Section 12.02(4)(b)(iii)
• Section 12.16 — Change for a small-business taxpayer that chooses to no longer capitalize costs under IRC Section 263A: Removes references to changes to proposed Treas. Reg. Section 1.263A-1 and to "early application year" in most places
• Section 12.17 — Recharacterizing costs under the simplified resale method, simplified production method or the modified simplified production method: Removes (1) Section 12.17(3), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13, and (2) Section 12.17(7), which included an audit protection exception in Section 8.02(1) of Revenue Procedure 2015-13
• Section 15.03 — Nonaccrual-experience method of accounting: Removes references to a change to an accrual method in a taxpayer's "first [IRC Section] 448 year"
• Section 15.12 — Change to the overall cash method for farmers: Removes Section 15.12(3), which included the temporary waiver of the eligibility rule in Section 5.01(1)(e) of Revenue Procedure 2015-13
• Section 15.17 — Small-business taxpayer changing to 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 the cash method for computing all other items of income and expense: Removes (1) references to obsolete method changes or provisions, including changes under Prop. Reg. Sections 1.448-2(b)(2), 1.448-2(c), 1.448-2(g)(1) and 1.460-3(b)(3); and (2) the terms "first [IRC Section] 448 year" and "early application year"
• Section 16.07 (formerly Section 16.08 of Revenue Procedure 2022-14) — Changes in AFS for purposes of applying certain revenue-recognition accounting methods: Removes changes under Sections 16.07(1)(a)(i)-(iv) for taxpayers using methods under (1) Revenue Procedure 2004-34, (2) the proposed regulations under Treas. Reg. Section 1.451-3 or 1.451-8, or IRC Section 451(b), and (3) other paragraphs related to these changes
• Section 16.08 (formerly Section 16.10 of Revenue Procedure 2022-14) — Changes in the timing of income recognition under IRC Section 451(b) and (c): Removes (1) Sections 16.08(2)(a)(i) and (2)(a)(ii), as well as 16.10(2)(b)(i) for a change to a method under IRC Section 451(b), Prop. Reg. Section 1.451-3, Prop. Reg. Section 1.451-8, Prop. Reg. Section 1.1275-2(l), and other paragraphs related to these changes, and (2) Section 16.08(5)(b) for changes related to specified credit card fees
• Section 19.01 — Small-business taxpayer exceptions from the requirement to account for certain long-term contracts under IRC Section 460 or to capitalize costs under IRC Section 263A for certain home construction contracts: Removes Section 19.01(4), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13
• Section 22.18 — Small-business taxpayer IRC Section 471(c) methods: Removes (1) any changes that reflect obsolete method changes or provisions (e.g., changes under IRC Section 471(c) or Prop. Reg. Section 1.471-1(b)), (2) Section 22.18(7), which offered no ruling protection for certain changes made under Section 22.18, and (3) "early application year" because a taxpayer can no longer timely file a change for the early application year
• Section 22.19 — Changes within an IRC Section 471(c) inventory method: Removes Sections 22.19(1)(a) and 22.19(1)(c)
• Section 22.20 — Changes from a small-business taxpayer IRC Section 471(c) inventory method to an inventory method under IRC Section 471(a): Removes references to a change from Prop. Reg. Section 1.471-1(b)(4), (5), or (6)

Additionally, Revenue Procedure 2023-24 removes the reference to "early application year" in:

• Section 20.13(1)(d) of Section 20.13 — Accrual-method taxpayer changing its accounting method for one or more inventory costs to treat those costs as incurred in accordance with Treas. Reg. Sections 1.461-1(a)(2) and 1.461-4(d)(4)
• Section 22.04(1)(d)(iii) of Section 22.04 — Taxpayer wants to change from an impermissible method of identifying or valuing inventories to a permissible method of identifying or valuing inventories
• Section 22.10(1)(d)(iii) of Section 22.10 — Taxpayer wants to change from one permissible method of identifying or valuing inventories to another permissible method of identifying or valuing inventories
• Section 22.17(1)(d)(iii) of Section 22.17 — Taxpayer wants to change from currently deducting inventories to a permissible method of identifying and valuing inventories

Changes to other existing automatic change guidance

In addition to amplifying and modifying Revenue Procedure 2022-14, Revenue Procedure 2023-24 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 2023-24 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 2023-24 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 2023-24 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 2023-24 is effective for Forms 3115 that are filed (i) on or after June 15, 2023, for a year of change ending on or after October 31, 2022, and (ii) under the automatic change procedures of Revenue Procedure 2015-13.

Revenue Procedure 2023-24 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 June 15, 2023, 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) July 17, 2023, 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 2023-24 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 June 15, 2023, for an accounting method change that still qualifies under the automatic change procedures.

Implications

The clarification in Section 7.02 (related to changes for specified research or experimental expenditures) indicates that upcoming administrative guidance will not allow recovery of IRC Section 174 costs through cost of goods sold or depreciation. The clarification is consistent with IRC Section 174(a)(1), as amended by the TCJA, which prohibits a deduction, other than through amortization under IRC Section 174(a)(2), of specified research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021. The clarification may imply that the IRS and Treasury view IRC Section 174 as superseding the treatment of costs under other Code provisions.

The modification to Section 16.08 (accounting method changes in income recognition, and formerly section 16.10 of Revenue Procedure 2022-14) to waive the "five-year" eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13 for both 2021 and 2022 tax years should be welcomed by taxpayers. Absent this modification, taxpayers may have had to file certain income-recognition accounting method changes intended to be effective for 2022 under the more administratively burdensome non-automatic change provisions. Taxpayers that did not timely file a 2022 non-automatic-accounting-method-change request by the end of their 2022 tax year may now make the change for 2022 under the automatic change provisions, provided the Form 3115 is filed no later than the due date for its 2022 tax return (and all other requirements in Section 16.08 and Revenue Procedure 2015-13 are satisfied). A taxpayer using the five-year eligibility rule waiver, however, may be required to accelerate the recognition of a remaining IRC Section 481(a) adjustment from a prior method change, or recognize a positive IRC Section 481(a) adjustment from the current change in full in the year of change.

The clarifications to Sections 24.01 (election to use the mark-to-market method under IRC Section 475) and 24.02 (change from the mark-to-market method under IRC Section 475 to a realization method) highlight the IRS's continued focus on taxpayers that want to make a method change for the same item more than once every five years. Taxpayers should take note of the requirements when determining whether a method change otherwise described in Section 24.01 or 24.02 can be made under the automatic change provisions. Taxpayers should also note that required election statements (i.e., under Revenue Procedure 99-17 or under Section 24.02(7), as applicable) must be timely filed regardless of whether the Form 3115 will be filed under the automatic or non-automatic change provisions.

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Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor