KPMG report: Updated list of automatic changes (Rev. Proc. 2022-14)
Rev. Proc. 2022-14 includes significant revisions to previously published guidance on automatic accounting method changes.
Rev. Proc. 2022-14
Rev. Proc. 2022-14 (released January 31, 2022, and published in the Internal Revenue Bulletin 2022-7 on February 14, 2022) updates and replaces Rev. Proc. 2019-43, which was the previous list of accounting method changes for which the automatic change procedures of Rev. Proc. 2015-13 apply (the “mass consent procedure”).
Rev. Proc. 2022-14 [PDF 1.7 MB] (457 pages) is effective for Form 3115, Application for Change in Accounting Method, filed on or after January 31, 2022, for a year-of-change ending on or after May 30, 2021.
Rev. Proc. 2022-14—in addition to compiling automatic accounting method changes released since the issuance of Rev. Proc. 2019-43 into one document—includes significant revisions to previously published guidance on automatic accounting method changes taxpayers need to be aware of.
Significant revisions to existing automatic method changes
The following are significant revisions in Rev. Proc. 2022-14 to prior guidance for a number of automatic method changes:
- A taxpayer that used an impermissible method to depreciate property placed in service in the tax year prior to the year of change (one-year property) and wants to make a change to a permissible method for depreciating the one-year property under the bonus depreciation regulations by filing an amended return or administrative adjustment request (AAR) must file the amended return or AAR before the date the federal income tax return is filed for the tax year succeeding the year bonus eligible property was placed in service.
- Section 481(a) adjustments (or components) resulting from changes to the depreciation method of a controlled foreign corporation (CFC) for tangible property under section 168(g) and that share the same characteristics must be combined and reported as a single net section 481(a) adjustment.
- The automatic change procedures for section 174 costs or software development costs described in Rev. Proc. 2000-50 do not apply for costs paid or incurred in tax years for which mandatory capitalization of research and experimental (R&E) under the “Tax Cuts and Jobs Act of 2017” (TCJA) is required.
- The automatic change to comply with section 267 for the deduction of amounts owed to a related foreign person is clarified to provide that it also applies to a taxpayer that, by reason of the exception in Reg. section 1.267(a)-3(c)(4), wants to change its method of accounting with respect to the deduction of amounts owed to a CFC that does not have any US shareholders owning its stock.
- An automatic change for employee commission liabilities is added to the list of automatic changes and applies if the commissions are paid within the first two and a half months following the end of the tax year to which the commissions relate.
- The automatic changes for UNICAP include a change for taxpayers with a Historic Absorption Ratio (HAR) election and using one of the simplified methods for resellers or producers that change to another permissible method of computing additional section 263A costs.
- The automatic change in method for interest capitalization under section 263A does not include a change from capitalizing interest to not capitalizing interest or vice versa for improvements to real property which fall under the associated property rules in Reg. section 1.263A-11(e)(1)(ii)(B).
- A taxpayer making a change to its method of recognizing income or advance payments under the section 451 regulations may disregard that change for purposes of applying the five-year prior change eligibility rule if the resulting section 481(a) adjustment is $0 and the change is made in an early adoption year or the first tax year beginning on or after January 1, 2021, as long as the taxpayer is not also making a change to adopt a cost-offset method.
- An example illustrates how the waiver of the five-year prior change eligibility rule applies to changes related to income recognition and advance payments.
- A nonlife insurance company implementing a change under section 807(f) must net section 481(a) adjustments for each item referred to in section 807(c).
- A taxpayer changing from a life insurance company to a nonlife insurance company (or vice versa) does not accelerate section 481(a) adjustments related to a change in the basis of computing reserves.
In addition to the significant revisions described above, Rev. Proc. 2022-14 also contains the following changes:
- The small taxpayer exemption methods of Rev. Proc. 2022-9 are incorporated into Rev. Proc. 2022-14. Read about these changes in a KPMG report [PDF 54 KB].
- Certain changes described in guidance issued prior to Rev. Proc. 2015-13 and Rev. Proc. 2019-43 are revised to bring them in line with the current procedures by updating references in those stand-alone documents.
- Language in Rev. Proc. 2019-43 which is obsolete due to updated guidance has been removed when no longer applicable.
Rev. Proc. 2022-14 provides transition rules for method changes that were not in Rev. Proc. 2019-43 and are now available under Rev. Proc. 2022-14 as well as method changes that were in Rev. Proc. 2019-43, but that are no longer available due to the revisions described above to Rev. Proc. 2022-14.
For changes that are no longer available under the automatic procedures, if the change was properly filed either by original or duplicate copy prior to January 31, 2022, then the IRS will honor the automatic change as filed. However, for changes that were not filed prior to January 31, 2022, the taxpayer must now resubmit the Form 3115 under the non-automatic change procedures of Rev. Proc. 2015-13. Note that the requirement for a non-automatic change to be submitted before the end of the year of change is waived for this transition rule. The Form 3115 for the taxpayer’s last tax year ending before January 31, 2022, may be submitted on or before the due date (including extensions) of the federal income tax return for the change year.
For non-automatic changes pending with the IRS National Office on January 31, 2022, a taxpayer may choose to convert the change and file under the automatic procedures if such a change is now described in Rev. Proc. 2022-14. To do so, a taxpayer must notify the IRS National Office of its intention to make the change under the automatic procedures before the later of March 2, 2022, or the issuance of a letter ruling granting or denying consent for the change. If the IRS National Office is timely notified, the taxpayer will receive a notice and a return of the user fee submitted with the initial request for a non-automatic change. The taxpayer must then submit the Form 3115 with a copy of the notice received from the IRS National Office recognizing the conversion of the change to file under the automatic procedures by the earlier of the 30th calendar day after receipt of the notice from the IRS National Office or the date the taxpayer files its federal income tax return for the year of change. The duplicate copy is considered filed on the date the original non-automatic change request was made.
For changes that are available under both Rev. Proc. 2019-43 and Rev. Proc. 2022-14, if a taxpayer has filed a duplicate copy before January 31, 2022, it has a choice to follow the procedures under either revenue procedure. If the taxpayer decides to file the change under Rev. Proc. 2022-14, the duplicate copy must be resubmitted with a statement on page 1 of Form 3115 stating: “FILED UNDER REV. PROC. 2022-14, AS PROVIDED IN SECTION .02(3)(c) OF THE EFFECTIVE DATE SECTION OF REV. PROC. 2022-14”. The duplicate copy of the resubmitted Form 3115 is considered filed as of the date the original duplicate copy was filed. In either case, the taxpayer may be required to provide substantiation in the form of proof of mailing that the original duplicate copy was filed before January 31, 2022.
Tax professionals have observed that, unfortunately, Rev. Proc. 2022-14 does not provide guidance related to the implementation of mandatory capitalization of R&E costs under TCJA. Costs paid or incurred in tax years for which the mandatory capitalization provision is in effect are not eligible for automatic change numbers 17 or 18. The IRS and Treasury are expected to issue separate guidance addressing procedures for these changes. If a legislative fix is enacted to delay or repeal the mandatory capitalization provision, Rev. Proc. 2022-14 as currently written would allow taxpayers to continue filing automatic changes for R&E costs for tax years beginning on or after January 1, 2022. Fiscal year taxpayers may also continue to use automatic change numbers 17 and 18 for costs paid or incurred during 2022 if those costs were paid or incurred prior to their first tax year beginning on or after January 1, 2022. Finally, taxpayers that amortized costs incurred prior to the first mandatory capitalization year for software development costs under Rev. Proc. 2000-50, may still make a change under automatic change number 18 to take the remaining unamortized costs as a deduction through a section 481(a) adjustment.
Rev. Proc. 2022-14 revised the section 481(a) adjustment rules for concurrent changes to depreciation of tangible property by a CFC under section 168(g). Prior guidance required adjustments be reported separately for each unit of property. The new rules permit the reporting of combined section 481(a) adjustments if the adjustments share all the same characteristics. The characteristics include that: the adjustments relate to the same qualified business unit (QBU); relate to the same tested unit; are either all positive or all negative; and have the same source, separate limitation classification, character, and treatment as described in Rev. Proc. 2021-26. For adjustments that do not share the same characteristics, separate section 481(a) adjustments must be reported for each different characteristic. For instance, a separate section 481(a) adjustment would be reported for each QBU subject to the change. While these netting rules are more complicated than if a single net section 481(a) adjustment for all units of property were permitted, the change will still reduce the burden on taxpayers making this change under the new guidance.
Despite some optimism that the IRS may also revise the guidance on when an amended return or AAR must be filed under this change for depreciable tangible property placed in service in the tax year prior to the year of change (one-year property), Rev. Proc. 2022-14 retains the same procedure as Rev. Proc. 2021-26 for a CFC changing from an impermissible method to a permissible method of depreciation. Taxpayers that want to make this change for one-year property by filing an amended return or AAR in lieu of Form 3115 will be required to file the amended return or AAR before the federal income tax return is filed for the tax year succeeding the year the property was placed in service by the CFC. This provision is consistent with similar rules for one-year property held by a domestic taxpayer.
The revisions to Section 16.10 provide much needed clarity for taxpayers. Because of the streamlined procedures provided in Rev. Proc. 2021-34 that allowed taxpayers adopting the final regulations the option to not file Form 3115 if the resulting section 481(a) adjustment was $0, there was confusion about whether a taxpayer would be deemed to have made a change under the streamlined procedures even if the taxpayer had no intention to make one. In the event such a change was deemed to be made, there was concern that that this would trigger the five-year limitation. Under the new guidance, such a deemed change is ignored for purposes of applying the five-year prior-change eligibility rule apart from changes to a cost-offset method since the cost-offset methods are not available under the streamlined procedures.
Less favorable for taxpayers is the new example in Section 16.10(5)(f) which indicates that for purposes of applying the five-year prior-change eligibility rule waiver, a change to adopt the cost-offset method and a change to the AFS income inclusion rule are viewed as a change to the same item. Therefore, except for changes made during the first tax year beginning after December 31, 2021 (the last year the prior change eligibility rule is waived), any taxpayer that has made a change within the last several years to come into compliance with the AFS income inclusion rules and then wants to use a cost-offset method described in the final regulations would have to file such a change under the non-automatic procedures. More generally, this example clarifies the IRS position on whether sub methods are considered separate items for applying the five-year prior change eligibility rule. Following this example, the answer would appear to be that any change to a sub method triggers the five-year prior change eligibility rule, and no other sub method may be changed within the same five-year window under the automatic change procedures.
A favorable extension with respect to section 263A changes allows a taxpayer using a simplified method with an HAR election to change to another method for capitalizing additional section 263A costs to ending inventories under the automatic consent procedures. After the end of the transition period to comply with the final section 263A regulations, the ability to make such a change under the automatic procedures would have otherwise expired. A taxpayer with an HAR election seeking to simply revoke the HAR election but to stay on the same simplified method will have to file under the non-automatic procedures unless the change is for the first, second, or third tax year beginning on or after November 20, 2018.
Similarly, the addition of commissions to the automatic procedures is one that taxpayers have long been asking for. However, the applicability of the new change is limited to situations when the commission is paid within two and a half months of the end of the tax year and only applies to commissions paid to employees. Commissions paid to independent contractors would appear to be outside the scope of the new change, since they would not be considered employees of the taxpayer. Nevertheless, a change to deduct commissions that relate to the creation of an intangible (such as a new sales contract) is still possible under automatic change number 78 using the employee compensation safe harbor for intangible costs.
The revisions to section 26.04 provide additional clarity and welcomed simplification to changes in reserves for insurance companies under section 807(f). Under Rev. Proc. 2019-43, taxpayers were required to calculate separate section 481(a) adjustments for each type of contract. For example, section 481(a) adjustments for changes to section 807(d) reserve calculations were required to be calculated separately for life insurance contracts and annuity contracts even if there was a single underlying method change. Rev. Proc. 2022-14 updates this paragraph to allow aggregation of the section 481(a) amounts for each item referred to in section 807(c). This revision implements the changes announced in the preamble to the section 807(f) final regulations. Read TaxNewsFlash
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