Procedural Guidance for Changes in Method of Accounting Under the Repair Regulations

On September 13, 2013, the IRS issued the final tangible property repair regulations which generally apply to taxable years beginning on or after January 1, 2014, but also permit a taxpayer to choose to apply the temporary or final repair regulations to taxable years beginning on or after January 1, 2012.   We have been waiting for the IRS to issue procedural guidance to help taxpayers understand the process of early adopting the final or temporary repair regulations to the 2012 and/or 2013 tax year.  On January 24, 2014, the IRS released the long-awaited procedural guidance, Rev. Proc. 2014-16.

Rev. Proc. 2014-16 modifies the procedures in Rev. Proc. 2012-19, 2012-14 I.R.B. 689, and Rev. Proc. 2011-14, 2011-4 I.R.B. 330, regarding certain changes in method of accounting for amounts paid to acquire, produce, or improve tangible property. Rev. Proc. 2014-16 provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in the final tangible property repair regulations.

Rev. Proc. 2014-16, however, does not address method changes under the proposed disposition regulations issued under section 168 of the Code.

Some of the key takeaways from Rev. Proc. 2014-16 are:

  • There are ten potential automatic accounting method changes identified.
  • A taxpayer that wants to make one or more changes in method of accounting relating to the same identified unit of property should file the change on the same Form 3115 and provide a single section 481(a) adjustment.  If one or more changes generate a negative 481(a) adjustment and other changes related to the same identified property generate a positive 481(a) adjustment, the taxpayer may report the net negative and net positive adjustments separately on the single Form 3115.
  • In addition to the other information required on line 12 of Form 3115, the taxpayer must include the following:
    • The citation to the paragraph of the repair regulations that provides for the proposed method, or methods, of accounting to which the taxpayer is changing; and
    • If the taxpayer is changing any unit(s) of property, such as identifying any building structure(s) or building system(s) of a building for purposes of determining whether amounts are deducted as repair and maintenance costs, or capitalized as improvement costs, the taxpayer must include a detailed description of the unit(s) of property, building structure(s), or buildings system(s) used under its present method of accounting and under its proposed method of accounting, together with a citation to the paragraph of the final regulation or temporary regulation under which the unit of property is permitted.
  • Small taxpayers (a taxpayer whose average annual gross receipts as determined under 1.263(a)-3(h)(3) for the three preceding taxable years is less than or equal to $10,000,000) have reduced filing requirements.

With all of these new changes, we understand the requirements of Rev. Proc. 2014-16 are perplexing.  Please reach out to your Anders advisor for additional insights and guidance on how to apply this revenue procedure.