Automatic consent for changing accounting methods under the “repair regs.”

The IRS recently issued Rev. Proc. 2014-16 describing the procedures to obtain automatic consent for changing to accounting methods required or permitted under the “repair” final regulations (T.D. 9636) and temporary regulations (T.D. 9564).

The final regulations are effective for tax years beginning on or after Jan. 1, 2014, but taxpayers may generally apply them to tax years beginning on or after Jan. 1, 2012. Taxpayers may apply the temporary repair regulations issued in 2011 to tax years beginning on or after Jan. 1, 2012, and before Jan. 1, 2014. Rev. Proc. 2014-16 supersedes Rev. Proc. 2012-19, which was released following the issuance of the temporary regulations.

Rev. Proc. 2014-16 also updates Rev. Proc. 2011-14 to include procedures to obtain automatic consent for certain changes in accounting methods involving acquisitions, production, and improvements of tangible property. Rev. Proc. 2014-16 does not address dispositions; they are addressed in a separate revenue procedure. Section 3.02 of Rev. Proc. 2014-16 adds new Section 10.11 to the appendix of Rev. Proc. 2011-14 to permit automatic consent for changes to:

• Deducting amounts paid or incurred to acquire or produce nonincidental materials and supplies for the first year in which the materials or supplies are used or consumed in the taxpayer’s operations (Regs. Secs. 1.162-3(a)(1) and 1.162-3(c)(1));
• Deducting amounts to acquire or produce incidental materials and supplies in the tax year in which they are paid or incurred (Regs. Secs. 1.162-3(a)(2) and 1.162-3(c)(1));
• Deducting amounts paid or incurred to acquire or produce nonincidental rotable and temporary spare parts in the tax year in which the taxpayer disposes of the parts (Regs. Secs. 1.162-3(a)(3) and 1.162-3(c)(2));
• Using the optional method of accounting for rotable and temporary spare parts (Regs. Sec. 1.162-3(e)); or
• Deducting amounts paid or incurred for repairs and maintenance, including a change in the classification of a unit of property, or, in the case of a building, a change in identifying the building structure or building systems (Regs. Secs. 1.162-4 and 1.263(a)-3(e)).

The appendix revisions also apply to:

• Capitalizing amounts paid or incurred for improvements to tangible property, including a change in the classification of a unit of property or, for a building, a change in identifying the building structure or building systems (Regs. Sec. 1.263(a)-3);
• By dealers in property, deducting amounts paid or incurred for commissions and other transaction costs that facilitate the sale of property (Regs. Sec. 1.263(a)-1(e)(2));
• By nondealers in property, capitalizing amounts paid or incurred for commissions and other costs that facilitate the sale of property (Regs. Sec. 1.263(a)-1(e));
• Capitalizing amounts paid or incurred to acquire or produce property, and, if depreciable, to depreciating such property under Sec. 167 or 168 (Regs. Sec. 1.263(a)-2)); or
• Deducting amounts paid or incurred in the process of investigating or pursuing the acquisition of real property (Regs. Sec. 1.263(a)-2(f)(2)(iii)).

Taxpayers who want to apply the de minimis rule under Regs. Sec. 1.263(a)-1(f) to amounts paid or incurred to acquire or produce a unit of property do not have to obtain approval for a change in accounting method, since the final regulations treat the de minimis safe harbor as an election.

To request automatic consent, taxpayers must file Form 3115, Application for Change in Accounting Method, with the IRS in Ogden, Utah, no later than the date of filing their federal income tax return for the year of the change. Taxpayers who properly filed consent applications under Rev. Proc. 2012-19 on or before Jan. 24, 2014, may file an amended application for the year of the change under Rev. Proc. 2014-16 by the due date of the income tax return for the year of the change, including extensions.

Under Rev. Proc. 2011-14, taxpayers generally are not permitted to request automatic changes in accounting methods if they are subject to scope limitations such as being under examination or having changed their overall accounting method within the previous five years. These scope limitations, however, will not apply to taxpayers changing their accounting methods under Rev. Proc. 2014-16 before Jan. 1, 2015.

Taxpayers who change their accounting method must make certain adjustments to income in the year of the change to prevent duplicating or omitting items. Rev. Proc. 2014-16 allows calculation of a modified Sec. 481(a) adjustment as of the first day of the tax year of the change for amounts paid or incurred in tax years beginning on or after Jan. 1, 2014 (or Jan. 1, 2012, if the taxpayer chose to adopt the regulations at that date). Taxpayers may use statistical sampling to determine the Sec. 481(a) adjustment for any accounting changes other than the “paid or incurred” methods, which require a modified Sec. 481(a) adjustment. If the taxpayer is requesting a change in one or more eligible accounting methods to the same unit of property, a single Form 3115 can be filed showing a single net Sec. 481(a) adjustment.

Rev. Proc. 2014-16 contains simplified filing requirements for taxpayers whose average gross receipts for the three previous tax years are less than or equal to $10 million.

Rev. Proc. 2014-16 is intended to simplify implementation of the repair regulations. The revenue procedure addresses a wide range of assets and should be consulted for detailed guidance. A separate revenue procedure, Rev. Proc. 2014-17, issued Feb. 28, provides guidance regarding dispositions of tangible property and general asset accounts. For more on the repair regulations generally, see “Implementing the New Tangible Property Regulations,” JofA, Feb. 2014, page 22.

By Susan Anderson, CPA, Ph.D., CFP (andersonse@appstate.edu), a professor of accounting in the Walker College of Business, Appalachian State University in Boone, N.C.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.