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IRS Releases Updated Guidance on Automatic Accounting Method Changes
The Internal Revenue Service (IRS) released updated guidance in January pertaining to automatic method change requests in Revenue Procedure 2022-14.
Revenue Procedure 2022-14
On January 31, 2022, the IRS issued guidance, Revenue Procedure 2022-14 (RP 2022-14), providing an updated list of automatic accounting method changes, superseding the previous list in Revenue Procedure 2019-43 (RP 2019-43). RP 2022-14 amends and removes obsolete language found in RP 2019-43 while placing limitations on filing certain method changes filed on or after January 31, 2022, for a year of change ending on or after May 31, 2021.
Additionally, RP 2022-14 now serves as the primary listing and information source for accounting method change requests filed under the automatic change procedures of Revenue Procedure 2015-13 (RP 2015-13).
RP 2022-14 contains several key modifications to the list of automatic changes provided in prior guidance, as well as revised language which changes the eligibility to taxpayers to obtain automatic consent for certain method changes. Significant revisions contained in RP 2022-14 include:
- Timing of incurring liabilities (Section 20.01 of RP 2019-43) – Modified to add a new paragraph that allows a taxpayer to change its method of accounting for taking into account certain employee commission liabilities.
- Impermissible to permissible depreciation method changes (Section 6.01) – Removes obsolete language allowing a Form 3115 to be filed under 6.01 for certain changes described under other automatic changes, depending on filing dates.
- Bonus depreciation elections and qualified improvement property (Section 6.18, 6.19, 6.20 and 6.21) – Clarifies and modifies the waiver of eligibility rules of RP 2015-13 and removes obsolete language. Section 6.21 is also changed to clarify guidance regarding the ability to adopt a permissible method of depreciation through the filing of an amended return or administrative adjustment request.
- Depreciation of tangible property by controlled foreign corporations (Section 6.22) – Requests additional disclosures about the §481(a) adjustment.
- Computer software and research and experimental expenditures under §174 (Section 7.01 and Section 9.01) – Modified section 7.01 to not apply to a change in method of accounting for the treatment of research and experimental costs paid or incurred in any taxable year for which §174 as amended by the Tax Cuts and Jobs Act is in effect. Additionally, Section 9.01 is modified to not apply to a change in the method of accounting for costs of developing computer software paid or incurred in any taxable year for which §174 as amended by the Tax Cuts and Jobs Act is in effect.
- Uniform capitalization methods (Section 12.01 and 12.02) – Modified to reflect that sections 12.01 and 12.02 apply to certain taxpayers that use an historic absorption ratio method. Obsolete language is also removed.
- Capitalizing interest (Section 12.14) – Modified language such that section 12.14 does not apply to a taxpayer that wants to change its method of accounting for interest from either capitalizing interest to not capitalizing interest or vice versa for improvements that involve the associated property rules in §1.263A-11(e)(1)(ii)(B).
- Method of accounting to comply with §267 (Section 13.01) – Clarifies language to apply to a taxpayer wanting to change its method of accounting with respect to the deduction of amounts owed to a controlled foreign corporation (CFC) that does not have any U.S. stakeholders owning stock of the CFC.
- Transportation industry taxpayer (Section 15.10) – Modifies that a taxpayer changing to the overall cash method of accounting must have average annual gross receipts of more than the inflation-adjusted amount provided for in §448(c)(4) and not in excess of $50,000,000.
- Accrual method for purchases and sales of inventories (Section 15.17) – Modified to clarify the language around the acceleration of a §481(a) adjustment remaining on a prior change in overall method of accounting to an accrual method.
- Timing of income recognition and cost offset (Section 16.10) – Modified changes in the timing of income recognition under §451(b) and (c). Modified to provide an example on how the 5-year eligibility rule under RP 2015-13 applies to certain changes made under this section. Clarified the situations in which the cost-offset related to certain inventory method changes apply and provides ordering guidance for concurrent cost-offset related method changes.
- Employee compensation (section 20.01) – Modified to provide that a change to the timing of incurring liabilities for employee compensation does not include medical services that are deferred compensation under §404.
- Ratable service contracts (Section 20.12) – Modifies the temporary waiver of the eligibility rule in section 5.01(1)(f) of RP 2015-13 because of obsolete language.
- Accounting for inventory for a small business (Section 22.18) – Modifies when the waiver of the eligibility rule in section 5.01(1)(f) of RP 2015-13 applies.
- Computing reserves (Section 26.04) – Modified language for a change in basis of computing reserves under §807(f). Additionally, obsolete information was removed from this section.
RP 2022-14 casts insight into the IRS's continued efforts to refine the list of automatic changes available to U.S. taxpayers. The IRS has published a significant amount of guidance over the past several years supporting the numerous changes to the Internal Revenue Code. The impact of how and when this guidance applies can at times be perplexing. Taxpayers should consult a tax professional when filing an accounting method change using this guidance.
Please contact your DHG tax advisor for more information.
Read the full text of IRS RP 2022-14.