January 18, 2010
Revised Procedures for Automatic Accounting Method Changes
By Tricia Werst, Tax Manager
When considering any change in method of accounting for federal income tax purposes, taxpayers must obtain prior IRS consent. Basically, 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:
- 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.
When a change of method is requested, there is generally an income recognition event which must be included in the taxpayer’s income, generally, ratably, over a four year period. This adjustment to income as a result of the change is defined within the Internal Revenue Code Section 481(a).
The IRS has issued new guidance contained in Revenue Procedure 2009-39, which modifies and 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, the taxpayer must reflect any necessary adjustments for amounts of salary bonuses capitalized to inventory.
The Revenue Procedure 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.
- Changing the accounting method of capitalizing costs paid or incurred to repair or maintain tangible personal property to treating these repair and maintenance costs as ordinary and necessary business expenses.
- Changing the method of accounting for capitalized debt issuance costs.
The new Revenue Procedure is generally effective for applications filed on or after August 27, 2009, for a year of change ending on or after December 31, 2008.