February 28, 2011
Revised Procedures for Automatic Accounting Method Changes
By Cesar Estrada, Senior Manager, Tax & Business
Pursuant to Code § 446(e), taxpayers must obtain the IRS’s consent before changing a method of accounting for federal income tax purposes. There are two types of accounting method changes: automatic and nonautomatic. The former, which is generally not subject to a user fee, includes, but is not limited to, the following changes:
- Change from a permissible to another permissible depreciation method
- Change from an impermissible to a permissible depreciation method
- Change from cash method to accrual method of accounting
A taxpayer may obtain automatic consent to change an accounting method by filing Form 3115 (Application for Change in Accounting Method). The original Form 3115 is attached to the taxpayer’s timely-filed (including extensions) federal income tax return for the year of the change. A copy of Form 3115 must also be filed with the IRS’s National Office no earlier than the first day of the year of change and no later than when the original form is filed with the taxpayer’s federal income tax return. Generally, the IRS will not require a taxpayer to change its method of accounting for the same item for a tax year before the change year if the proper automatic consent procedures were followed. Moreover, the IRS will generally not require a taxpayer to change or modify its new method of accounting except in certain limited circumstances, but even when such a change or modification is required it normally will not be applied retroactively.
New IRS guidance contained in Rev. Proc. 2009-39 modifies and clarifies Rev. Proc. 2008-52 in several ways, including the manner in which the net § 481(a) adjustment is computed. A taxpayer must now consider all relevant accounts when computing the net § 481(a) adjustment. For instance, in computing the net § 481(a) adjustment for a change in the proper time for deducting salary bonuses under Code § 461 the taxpayer must reflect any necessary adjustments for amounts of salary bonuses capitalized to inventory pursuant to Code § 263A.
Rev. Proc. 2009-39 also adds several new accounting method changes for which automatic consent may be obtained, including but not limited to:
- Changing the method of accounting for materials and supplies on hand to the method of treating the cost of materials and supplies as a deferred expense to be taken into account in the taxable year in which they are actually consumed and used in operation, consistent with Reg. § 1.162-3.
- Changing the accounting method of capitalizing costs paid or incurred to repair or maintain tangible personal property under Code § 263(a) to treating these repair and maintenance costs as ordinary and necessary business expenses under Code § 162 and Reg. § 1.162-4.
- Changing the method of accounting for capitalized debt issuance costs to comply with Reg. § 1.446-5, which provides rules for allocating the costs over the term of the debt.
Rev. Proc. 2009-39 is generally effective for applications filed under Rev. Proc. 2008-52 on or after August 27, 2009, for a year of change ending on or after December 31, 2008. For Forms 3115 filed under Rev. Proc. 97-27, Rev. Proc. 2009-39 is effective for applications filed on or after August 27, 2009, for a year of change ending on or after August 27, 2009.
Reviewed by Michele Lipson