In Revenue Procedure 2024-34, the IRS has amended Section 7 of Revenue Procedure 2024-23 to modify the procedures under IRC Section 446 for obtaining the Commissioner's automatic consent to change to an accounting method for expenditures paid or incurred in tax years beginning after December 31, 2021. The modifications apply to method changes made to (1) comply with IRC Section 174 or (2) rely on the interim guidance in Notice 2023-63, as amended by Notice 2024-12.

Specifically, Revenue Procedure 2024-34 modifies the eligibility rules in Section 7.01(5)(a) of Revenue Procedure 2024-23, so that the restrictions on automatic change eligibility in Section 5.01(1)(d) and (f) of Revenue Procedure 2015-13 do not apply to a change that is made under Section 7.01(1)(a) of Revenue Procedure 2024-23 for a tax year beginning in 2022 or 2023. The restrictions in automatic change eligibility in Section 5.01(1)(f) of Revenue Procedure 2015-13 generally prevent a taxpayer from making a change for the same item during the five tax years ending with the year of change. The restrictions on automatic change eligibility in Section 5.01(1)(d) generally prevent a taxpayer from making a change if the requested year of change is the final year of the taxpayer's trade or business.

Revenue Procedure 2024-34 also modifies the rules in Section 7.01(5)(b) of Revenue Procedure 2024-23, which allow taxpayers to make successive tax year changes. Under Revenue Procedure 2024-34, a taxpayer may make a change under Section 7.01(1)(a) of Revenue Procedure 2024-23 for a tax year beginning in 2022 or 2023, regardless of whether the taxpayer made a change for the same item in a previous tax year beginning in 2022 or 2023. The prior rule on successive changes only referred to a taxpayer making a change for the same item in its second tax year beginning after December 31, 2021.

Additionally, Revenue Procedure 2024-34 modifies the rules on limited audit protection in Section 7.01(6) of Revenue Procedure 2024-23; consequently, taxpayers that did not make the accounting method change to comply with IRC Section 174 for the first tax year beginning after December 31, 2021, will not receive audit protection for a change made in any tax year beginning in 2022 or 2023 (except for the first tax year beginning after December 31, 2021) for expenditures paid or incurred in the first tax year beginning after December 31, 2021. The prior rule only excluded audit protection for the second tax year beginning after December 31, 2021, for taxpayers that did not change their method to comply with IRC Section 174 for the first tax year beginning after December 31, 2021.

Implications

The modification to Section 7.01(5)(a) of Revenue Procedure 2024-23 is particularly helpful to taxpayers that (1) had a short tax year in either 2022 or 2023, (2) made a change to comply with IRC Section 174 in their first tax year beginning after December 31, 2021, and (3) seek to refine their method in their third tax year, beginning in 2023. Without the modification, those taxpayers would have to file a method change under the non-automatic change procedures, as the waiver of the five-year same-item restriction for using the automatic change procedure would not have applied. The modification to Section 7.01(5)(a) of Revenue Procedure 2024-23 also makes it possible for corporate taxpayers in their final year of trade or business in 2023 to make a change to apply the rules in Section 7 of Notice 2023-63, which addresses the treatment of unamortized IRC Section 174 expenses in a corporate termination, to the year in which the corporate termination occurs. Without this modification, taxpayers may not have been eligible to make a change to apply the rules of Section 7 of Notice 2023-63 for the termination year without requests for relief from both the filing deadline for non-automatic method changes and the restriction on requesting the year of change to be the final year of the trade or business under Section 5.01(2)(b) of Revenue Procedure 2015-13.

The modifications to Section 7.01(5)(b) of Revenue Procedure 2024-23, on successive changes, similarly support a taxpayer with short tax years in 2022 or 2023 making changes to refine its method under IRC Section 174 by expanding the provision to cover changes made in 2022 or 2023, regardless of whether the tax year is beyond the taxpayer's second tax year beginning after December 31, 2021.

The revisions to Section 7.01(6) of Revenue Procedure 2024-23, which addresses audit protection for changes to the treatment of IRC Section 174 expenses, retain the restriction on audit protection for expenditures paid or incurred in tax years beginning before January 1, 2022. The revisions also expand the restriction to changes for any tax year beginning in 2022 or 2023 (other than the first tax year beginning after December 31, 2021), if a taxpayer did not change its method to comply with IRC Section 174 for its first tax year beginning after December 31, 2021. Previously, the audit protection was inapplicable only to the second tax year beginning after December 31, 2021. Therefore, a taxpayer with short tax years will not receive audit protection for its treatment of expenditures paid or incurred in its first tax year beginning after December 31, 2021, if it (1) did not make a change to comply with IRC Section 174 in that year and (2) makes a change in any tax year beginning in 2022 or 2023. A taxpayer, however, will receive audit protection for its treatment of expenditures paid or incurred after December 31, 2021, if it files a method change to comply with IRC Section 174 for the first time in 2024. A taxpayer in this situation (no prior IRC Section 174 change and a change filed for a tax year after 2023) will not be restricted from using the automatic change procedure and will receive audit protection for its treatment of IRC Section 174 costs for tax years beginning after December 31, 2021.

These changes to Section 7.01 of Revenue Procedure 2024-23 respond to concerns raised by taxpayers and their representatives about the operation of the method change rules for IRC Section 174, as technical and procedural guidance was released over the fall and winter of 2023 and the spring of 2024.