On June 15, 2023, the IRS released Rev. Proc. 2023-24, List of Automatic Changes, which provides an update to the list of tax accounting method changes a taxpayer may file under the IRS’s automatic procedures. Automatic accounting method changes may be filed with a taxpayer’s federal income tax return, and as such, this new revenue procedure clarifies the availability of accounting method changes that should be considered for inclusion with a 2022 federal income tax return. Attached below is a table listing notable changes in the revenue procedure and identifying specific accounting method changes that are available in the revenue procedure.
This guidance (in conjunction with Rev. Proc. 2015-13) sets forth the specific procedures, including terms and conditions, for each automatic change. In addition to cleaning up its predecessor, Rev. Proc. 2022-14, and striking terms and conditions for certain accounting method changes that are now obsolete, Rev. Proc. 2023-24 addresses new automatic changes provided in Rev. Proc. 2023-8 and Rev. Proc. 2023-15 for the treatment of § 174 costs and natural gas transmission and distribution property, clarifies long-standing terms and conditions for changes to overall cash and accrual methods and mark-to-market methods, and provides some flexibility for taxpayers complying with new regulations under § 451(b) and (c).
Background
Under § 446(e), a taxpayer must obtain IRS consent prior to changing its accounting method. A change in method of accounting may include either a change in an overall plan of accounting for gross income or deductions (e.g., a change from the cash method of accounting to an accrual method) or a change in the treatment of any material item used in such overall plan (e.g., a change in the taxpayer’s depreciation method). IRS consent is required because a change in tax accounting method affects when items of income or expense are recognized. Further, IRS review of the proposed accounting method change ensures that the taxpayer’s chosen method is proper and that it clearly reflects income.
To facilitate this approval process, the IRS grants automatic consent for certain accounting method changes. Regularly, the IRS identifies the specific accounting method changes eligible for automatic consent, and compiles them in a periodically-updated revenue procedure. Rev. Proc. 2023-24 is the most recent update to the List of Automatic Changes and identifies 29 significant modifications to its predecessor, Rev. Proc. 2022-14. A taxpayer applies for automatic consent by including an original Form 3115, Application for Change in Accounting Method, with its federal income tax return for the year of the change and filing a duplicate copy with the IRS in Ogden, UT. IRS consent is granted provided the taxpayer complies with all the applicable provisions of the consent procedures. The general procedures for both automatic and non-automatic method changes are provided in Rev. Proc. 2015-13.
General transition rule
The new List of Automatic Changes is effective for Forms 3115 filed on or after June 15, 2023, for a year of change ending on or after October 31, 2022. There is a transition rule available to taxpayers that have filed copies of automatic method changes with the IRS National Office under Rev. Proc. 2022-14, but have not yet filed the corresponding original Form 3115 with a timely filed federal income tax return. The transition rule offers flexibility, permitting taxpayers either to perfect previously filed documents pursuant to Rev. Proc. 2022-14 or to file a new Form 3115 pursuant to the provisions of Rev. Proc. 2023-24. Transition rules are also provided for taxpayers that have filed 2022 method change requests under non-automatic procedures that now qualify for automatic procedures and for taxpayers that have filed 2022 method change requests under automatic procedures that no longer qualify for automatic procedures.
Research and Experimentation Costs
The updated guidance incorporates the new automatic change for specified research or experimental expenditures provided in Rev. Proc. 2023-8. Rev. Proc. 2023-24 also updates the change under section 7.02 to clarify that it includes a change from capitalizing specified research and experimental expenditures to inventoriable property or depreciable property and recovering those costs through cost of goods sold or depreciation, respectively, to the required treatment of such expenditures under § 174 (as modified by the TCJA). For more information on the treatment of research and experimental expenditures under § 174, as modified by the TCJA, see our Tax Practice’s Alert.
Changes in Income Recognition under § 451(b) and (c)
Rev. Proc. 2023-24 extends the waiver of the five-year rule for one additional year with regard to changes under section 16.08(2)(a)(i), (2)(a)(ii), or (2)(b), for a taxpayer that did not apply Treas. Reg. §§ 1.451-3, 1.451-8, and/or 1.1275-2(l) for a taxable year beginning before January 1, 2021. However, it also provides special rules for taking into account § 481(a) adjustments for taxpayers using the eligibility waiver to make a change under section 16.08(2)(a)(i), (ii), or (2)(b) and that have made a prior change for the same item under section 16.10(2)(a)(iii), (iv), or (2)(b)(ii) of Rev. Proc. 2022-14 (or successor). First, if such a taxpayer has a remaining § 481(a) adjustment from the prior change, the taxpayer must take the remaining balance of the prior § 481(a) adjustment into account in computing taxable income for the year of change. Second, if such a change results in a positive § 481(a) adjustment and the prior change resulted in a negative § 481(a) adjustment, the taxpayer must take the full positive § 481(a) adjustment into account in computing taxable income for the year of change (i.e., no four-year spread). Two examples applying these special rules are provided in section 16.08(4)(b)(v)(C) and (D). For more information on the regulations under § 451(b) and (c), see our Tax Practice’s Alert.
Mark-to-market methods
Significant modifications were made to the automatic changes for mark-to-market methods under § 475. These changes include a change for commodities dealers, securities traders, and commodities traders electing to use the mark-to-market method of accounting under § 475(e) or (f) (section 24.01) and a change from the mark-to-market method of accounting described in § 475 to a realization method (section 24.02). Both changes require both a Form 3115 and a timely filed Election Statement or Notification Statement, as applicable.
The new guidance clarifies that a taxpayer that makes a timely election under § 475 must file a Form 3115 under section 24.01(5) to change its method of accounting if its methods for securities or commodities subject to the election for the taxable year immediately preceding the election year is inconsistent with § 475. The new guidance also clarifies that a taxpayer must file a change in method of accounting for an election to mark to market securities or commodities, as applicable, unless it is the first taxable year in which the taxpayer owns securities or commodities, as applicable.
Further, the new guidance clarifies that automatic changes are not available for:
- a taxpayer that wishes to make a new § 475 election and that has revoked a previous § 475 election within the five taxable years ending with the new election year
- a taxpayer that wishes to revoke a § 475 election and change to the realization method within five years of the election year
- a dealer in securities (as defined in § 475(c)(1)) that wishes to change to the realization method
Such taxpayers must request method changes under non-automatic procedures and file the requisite Election Statement or Notification Statement, as applicable, in accordance with the procedures specified in Rev. Proc. 2023-24.
Depreciation change update
The new List of Automatic Changes updates terms and conditions for a change from an impermissible to a permissible method of accounting for depreciation or amortization under section 6.01 to allow the change to be filed for property for which the taxpayer has claimed a federal income tax credit provided that the change does not alter the amount of the credit.
Natural Gas Safe Harbor Method
Rev. Proc. 2023-24 incorporates automatic method changes that were granted in individual pieces of guidance since Rev. Proc. 2022-14 was issued. For example, section 3.12 incorporates the new safe harbor method of accounting for natural gas transmission and distribution property provided under Rev. Proc. 2023-15. The new guidance updated the terms and conditions of the natural gas safe harbor method to provide a statement agreeing to additional terms and conditions is required to be filed with a Form 3115 for public utility property within the meaning of § 168(i)(10). Specifically, a taxpayer must agree that a normalization method of accounting will be used for the public utility property, it will adjust its regulatory deferred tax reserve or similar account by the amount of federal income tax deferral associated with the § 481(a) adjustment related to the public utility property, and it will provide a copy of the Form 3115 to any regulatory body having jurisdiction over the public utility property within 30 days of filing its federal income tax return for the year of change. Further, the revenue procedure clarifies that a taxpayer’s § 481(a) adjustment does not include any amount attributable to property subject to an election to capitalize repair and maintenance costs under Treas. Reg. § 1.263(a)-3(n) for any taxable year in which the election was made. For more information on the natural gas safe harbor method, see our Tax Practice’s Alert.
Cash and accrual methods of accounting
The government cleaned up some of the long-standing terms and conditions for automatic changes related to cash and accrual methods. Section 15.01 allows an automatic change in overall method from the cash method, or from an accrual method with regard to purchases and sales of inventories and the cash method for all other items, to an accrual method. The prior List of Automatic Changes allowed “a change in overall method from the cash method to an accrual method” and then clarified in the terms and conditions that the change was not available for “hybrid methods,” but that the cash method included a method where purchases and sales of inventories were accounted for under an accrual method and all other items were accounted for under the cash method. The government streamlined these terms and conditions by eliminating reference to a “hybrid method,” removing use of the accrual method for inventory and the cash method for all other items from the definition of “cash method,” and instead permitting the change to an accrual method for taxpayers currently using (1) the cash method or (2) an accrual method for purchases and sales of inventories and the cash method for all other items. This update provides greater clarity regarding the scope of the automatic change.
The new guidance added citations to specific rules relating to farmer’s expenses and identified the crop method under Treas. Reg. § 1.162-12 as an example of a special method of accounting. Additionally, Rev. Proc. 2023-24 provides that a taxpayer filing a change under section 15.01(1)(a) to comply with Treas. Reg. § 1.451-3 is no longer required to attach a statement describing its proposed method(s) under Treas. Reg. § 1.451-3. Rather, such a taxpayer completes Line 3 of Schedule B on the Form 3115 to satisfy this information reporting requirement.
Other notable modifications
The chart below summarizes the significant modifications, other than removing obsolete provisions, made by Rev. Proc. 2023-24 to the List of Automatic Changes.
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