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In Revenue Procedure 2024-23, the IRS updates the list and substantive content of certain automatic accounting method changes. Revenue Procedure 2024-23 makes numerous changes to existing automatic change guidance, as highlighted in the Significant Developments section of the Revenue Procedure. As noted further herein, Revenue Procedure 2024-23 generally (subject to transition rules) is effective for Forms 3115 that are filed (i) on or after April 30, 2024, for a year of change ending on or after September 30, 2023, and (ii) under the automatic change procedures of Revenue Procedure 2015-13.

Below is a summary of certain notable revisions. Specific reference should be made to the relevant method change section of the procedure in undertaking eligibility for and implementation of any automatic accounting method change. This Revenue Procedure may be subsequently modified as the IRS issues guidance during the next year and before reissuing the entire Revenue Procedure.

Significant changes to prior automatic accounting method procedures in Revenue Procedure 2023-24

Removal or clarification of certain obsolete language

Revenue Procedure 2024-23 removes the following sections included in Revenue Procedure 2023-24 because they are obsolete:

• Section 7.01 — Relating to changes to a different method or different amortization period for research and experimental expenditures
• Section 12.18 — Relating to the revocation of elections under IRC Section 263A(d)(3)
• Section 20.13 — Relating to an accrual-method taxpayer that wants to change its accounting method for one or more inventory costs to treat those costs as incurred in accordance with Treas. Reg. Section 1.461-1(a)(2) and 1.461-4(d)(4)

Revenue Procedure 2024-23 modifies the following list of automatic changes to remove language because it is obsolete:

• Section 6.01 — Changing from an impermissible to a permissible accounting method for depreciation or amortization: Removes the second sentence of Section 6.01(1)(c)(xx), which allowed an accounting method change under Section 6.21 to be filed under Section 6.01 if a duplicate copy was properly filed under Section 6.01 before May 11, 2021
• Section 6.18 — Changing from an impermissible to a permissible accounting method for qualified improvement property placed in service after December 31, 2017: Removes paragraph (2), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(d) and 5.01(1)(f) of Revenue Procedure 2015-13
• Section 6.19 — Certain late elections under IRC Sections 168 and 1502 or revocation of certain elections under IRC Section 168: Removes references to Revenue Procedure 2020-25
• Section 6.21 — Depreciation of tangible property under IRC Section 168(g) by controlled foreign corporations: Removes the sunset provision in paragraph (3) to allow controlled foreign corporations to continue to change their depreciation method to the alternative depreciation system under the automatic change procedures of Revenue Procedure 2015-13
• Section 12.07 — Change not to apply IRC Section 263A to one or more plants removed from the list of plants that have a preproductive period exceeding of two years: Removes Section 12.07(2), which granted audit protection for blackberry, raspberry, and papaya plants for tax years that end on or before February 15, 2013
• Section 15.01 — Changes in overall method from the cash receipts and disbursements method to an accrual method: Removes Section 15.01(5)(b), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(e) of Revenue Procedure 2015-13 for changes to comply with IRC Section 451(b)
• 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 Section 15.17(6)(b), which allowed a temporary waiver of the eligibility rule in Section 5.01(1)(e) of Revenue Procedure 2015-13
• Section 16.08 — Changes in the timing of income recognition under IRC Section 451(b) and (c): Removes Section 16.08(4)(a) for short Form 3115, Section 16.08(4)(c) for the streamlined method change procedures for certain taxpayers, Section 16.08(5)(c) for certain changes with an IRC Section 481(a) adjustment of zero being disregarded for eligibility rules, Section 16.08(6)(a) for audit protection for taxpayers using the streamlined method change procedures and Section 16.08(6)(b)(i) for audit protection for taxpayers under examination
• Section 22.18 — Changes by a small-business taxpayer to certain IRC Section 471 methods of accounting: Removes streamlined method change procedures for certain taxpayers
• Section 23.01 — Certain changes from the LIFO inventory method: Removes Section 23.01(8), which denied ruling protection in certain cases

Additionally, Revenue Procedure 2024-23 removes the reference to the temporary waiver of the eligibility rule in 5.01(1)(f) (addressing whether the taxpayer has made or requested a change for the same item during any of the five tax years ending with the year of change) of Revenue Procedure 2015-13 in:

• Section 12.01 — Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers
• Section 12.02 — Certain UNICAP methods used by producers and reseller-producers
• Section 12.16 — Change for a small-business taxpayer that chooses to no longer capitalize costs under IRC Section 263A
• Section 22.04 — Taxpayer that wants to change from an impermissible method of identifying or valuing inventories to a permissible method of identifying or valuing inventories
• Section 22.10 — Changes to permissible methods of identification and valuation of inventories
• Section 22.17 — Changes from currently deducting inventories to permissible methods of identification and valuation of inventories
• Section 22.18 — Changes by a small-business taxpayer to certain IRC Section 471 methods of accounting
• Section 23.01 — Certain changes from the LIFO inventory method

Changes to other existing automatic change guidance

In addition to amplifying and modifying Revenue Procedure 2023-24, Revenue Procedure 2024-23 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: Modifies Section 5.02(3)(a) to clarify 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 eligibility rule in Section 5.01(1)(f) of Revenue Procedure 2015-13 does not apply to an accounting method change in Section 5.06 of Revenue Procedure 2007-48 and made under Section 22.08 of Revenue Procedure 2024-23
• Revenue Ruling 2004-62, Business expenses pertaining to post-establishment fertilization of timber stand: Requires taxpayers to use the automatic change procedures in Revenue Procedure 2015-13 to make an accounting method change to comply with Revenue Ruling 2004-62
• Revenue Ruling 2000-7, Permitting taxpayers to recover missed depreciation for eligible disposed assets: Establishes that taxpayers must use the automatic change procedures of Revenue Procedure 2015-13 to conform with Revenue Ruling 2000-7

Effective date

Revenue Procedure 2024-23 is effective for Forms 3115 that are filed (i) on or after April 30, 2024, for a year of change ending on or after September 30, 2023, and (ii) under the automatic change procedures of Revenue Procedure 2015-13.

Revenue Procedure 2024-23 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 April 30, 2024, 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) May 30, 2024, 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 2024-23 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 April 30, 2024, for an accounting method change that still qualifies under the automatic change procedures.

Implications

IRC Section 174

Although the language allowing successive changes (Section 7.01(5)(b)) and describing limited audit protection (Section 7.01(6)) was modified, Treasury officials have publicly indicated that their intent was simply to clarify that both a successive change and audit protection generally would be afforded to a taxpayer that makes a good faith attempt to comply with IRC Section 174, as amended by the TCJA, in the first year beginning after December 31, 2021. For example, a taxpayer may receive audit protection even if it changed its treatment of IRC Section 174 costs for the first year beginning after December 31, 2021, to capitalize and amortize those costs, but did not include the requisite statement (required by Section 7.01(3)(a)(ii)) or a Form 3115 with its return for that year, and did not satisfy the transition rule in Section 7.01(4). (It appears that these comments did not address method changes under Section 8 (long-term contracts under IRC Section 460); Treasury officials have publicly indicated that a Form 3115 is required to implement valid method changes under Section 8.)

The inclusion in Section 7.01(5)(a) of a waiver of the final year of a trade-or-business restriction (Section 5.01(1)(d) of Revenue Procedure 2015-13) may be particularly helpful to a corporate taxpayer that would like to adopt Section 7.04(2)(a) of Notice 2023-63 for its final year. Section 7.04(2)(a) of Notice 2023-63 allows a corporation to deduct its unamortized IRC Section 174 costs in the year a corporation ceases to exist in a transaction to which IRC Section 381(a) does not apply. The waiver of the final year of trade or business restriction, however, only applies to a taxpayer's first or second year beginning after December 31, 2021. Therefore, the waiver does not apply for a taxpayer that ceases to exist in a tax year that is its third (or later) tax year beginning after December 31, 2021, (if, for example a calendar-year taxpayer had a short tax year in 2022). When the taxpayer ceases to exist in a tax year that is its third (or later) tax year beginning after December 31, 2021, the Section 7.01(5)(a) waiver of the five-year-same-item change restriction (Section 5.01(1)(d) of Revenue Procedure 2015-13) also does not apply, as it also only applies to a taxpayer's first or second tax year beginning after December 31, 2021. See also, Section 5.05(1) of Revenue Procedure 2015-13.

A taxpayer in this circumstance would be excluded from making a change to adopt Section 7.04(2)(a) of Notice 2023-63 under the automatic change procedures of Revenue Procedure 2024-23 and would have to show compelling circumstances or demonstrate that it is in the interest of sound tax administration to allow the taxpayer to make the change in accounting method in its final year (see Section 5.03(2)(b) of Revenue Procedure 2015-13). Where a taxpayer ceased to exist in a tax year ending before September 30, 2023, the waiver of the final year of a trade-or-business restriction in Section 7.01(5)(a) will not apply, as Revenue Procedure 2024-23 is only effective for a year of change ending on or after September 30, 2023.

Taxpayers ineligible to use Revenue Procedure 2024-23 to make an automatic change in accounting method to adopt Section 7.04(2)(a) of Notice 2023-63 (and deduct unamortized IRC Section 174 costs in their final year) may also find they cannot make the change in accounting method under non-automatic procedures, as a Form 3115, Application for Change in Accounting Method, filed under the non-automatic procedures must be filed by the last day of the taxpayer's year of change (which may have already passed). See Section 6.03(2)(a)(i) of Revenue Procedure 2015-13. Taxpayers seeking an extension of time to file a Form 3115 under the non-automatic procedures may have to demonstrate unusual and compelling circumstances. See Section 6.03(4)(b) of Revenue Procedure 2015-13.

UNICAP

The Revenue Procedure effectively removed from the automatic method change list certain UNICAP sub-method changes, including changes to or from: (1) the direct reallocation method and the step-allocation method for mixed-service costs, and (2) the 90-10 de minimis rule for mixed-service costs for taxpayers using the direct reallocation method or step-allocation method. These changes represent a significant change. Over the past several years, taxpayer's have enjoyed the flexibility associated with being able to make method changes to use (or terminate the use of) these UNICAP sub-methods on an automatic basis. Going forward, taxpayers considering method changes to or from these UNICAP sub-methods will need to take into consideration the accelerated filing deadline for non-automatic method changes and evaluate the possibility that the IRS may require additional information or dictate other case-by-case limitations to approve such method changes.

Natural gas transmission and distribution property

Revenue Procedure 2023-15 established a safe harbor accounting method that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property (1) must be capitalized as improvements under IRC Section 263(a) or as the costs of property produced under IRC Section 263A or (2) can be deducted under IRC Section 162. To encourage taxpayers to adopt Revenue Procedure 2023-15, the IRS included certain favorable casualty loss provisions as part of the "disposition/loss per se capitalization rules" if the change was made in the first tax year ending after May 1, 2023. The new automatic revenue procedure adds an additional year to implement a method change to apply this particular rule. Therefore, changes made in the first or second tax year ending after May 1, 2023, are eligible for this beneficial provision.

IRC Section 475

Section 24.02 (relating to taxpayers requesting to change their method of accounting from the mark-to-market method under Section 475 to a realization method) is clarified to provide that a dealer in securities making this change under the non-automatic provisions of Revenue Procedure 2015-13 must also file a Notification Statement that satisfies all the applicable requirements of Section 24.02(7) of Revenue Procedure 2024-23, in addition to filing a Form 3115. We understand that this statement requirement is a new refinement to the IRS's previously articulated position, that such dealers must file Form 3115 and use the non-automatic method change procedure. Revenue Procedure 2024-23 (generally consistent in approach with Revenue Procedure 99-17) requires the statement to be filed no later than the due date (without regard to extensions) of the original federal income tax return for the tax year immediately preceding the year of change. Taxpayers must attach the statement either to that return or, if applicable, to a request for an extension of time to file that return.