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March 21, 2012 Tax Watch: The IRS has issued two much-anticipated revenue procedures that spell out how taxpayers can automatically change their accounting methods to a method permitted under recent temporary tangible property capitalization-repair regulations. Taxpayers who follow the guidance in the revenue procedures do not have to obtain advance consent from the IRS to change their methods of accounting to conform to the sweeping new rules under the temporary regulations.

New Guides for Accounting Method Change Under Tangible Property Rules

  • 3/21/2012

New Guides for Accounting Method Change Under Tangible Property Rules

The IRS has issued two much-anticipated revenue procedures that spell out how taxpayers can automatically change their accounting methods to a method permitted under recent temporary tangible property capitalization-repair regulations. Taxpayers who follow the guidance in the revenue procedures do not have to obtain advance consent from the IRS to change their methods of accounting to conform to the sweeping new rules under the temporary regulations.

Background

Taxpayers need the IRS’s consent to change their methods of accounting, whether for particular items or for their overall accounting methods. Whether or not it is seeking automatic consent or advance consent, a taxpayer must request the change on Form 3115, Application for Change in Accounting Method.

Rev. Proc. 2011-14 provides the procedures for taxpayers to file automatic changes and lists those changes that must be filed under the automatic consent procedures in the Appendix. The transitional guidance generally amends Rev. Proc. 2011-14 to allow changes made under the regulations to be made under the automatic consent procedures.

Rev. Proc. 2012-19

The recent regulations were issued in temporary and proposed form. They generally apply to tax years beginning on or after January 1, 2012, and do not apply to 2011 returns. Accordingly, taxpayers will be changing their accounting methods for tax years beginning on or after January 1, 2012.

The transitional guidance also addresses changes to units of property, rotable and temporary spare parts, de minimis amounts, the routine maintenance safe harbor, and the capitalization of certain transaction costs related to acquisition or production costs.

Scope limitations

Ordinarily, under Rev. Proc. 2011-14, a taxpayer cannot request automatic consent to change its accounting method, if particular conditions apply. For example, if the taxpayer is under examination (with certain exceptions), or other conditions apply. Rev. Proc. 2012-19 makes the scope limits inapplicable for a taxpayer that changes its accounting method for its first or second taxable year beginning after December 31, 2011.

After its second year (after 2011), the scope limitations will apply, and taxpayers cannot file for an automatic change if any of the limitations are applicable.

Code Sec. 481 adjustment

Code Sec. 481(a) requires adjustments to prevent amounts from being duplicated or omitted when a taxpayer changes an accounting method from the method used in the previous year. The general rules allow taxpayers to make a negative change in one year (the year of the change) and allow positive adjustments to be made in as many as four years. Some changes are made on a cut-off method and apply going forward only.

For other changes, such as deducting materials and supplies when used or consumed, the taxpayer only has to take into account amounts paid or incurred in taxable years beginning on or after January 1, 2012.

Statistical sampling

Both revenue procedures permit statistical sampling. Taxpayers can take a sample of similar assets and figure out the repair costs. This makes the computation easier. Taxpayers under examination can also use statistical sampling.

Taxpayers had hoped to see extrapolation, but the IRS, without explanation, did not allow it here. This would also have made the computations much easier. It was allowed in the industry guidance for electric transmission and distribution costs in Rev. Proc. 2011-43.

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