Rev. Proc. 2014-16 - Guidance for changes in method of accounting under the final tangible property regulations  

January 24: The IRS today issued an advance copy of Rev. Proc. 2014-16 that describes the procedural rules that taxpayers must follow to change a method of accounting to comply with the final tangible property regulations (or the so-called “repair regulations.”)

The repair regulations are effective for tax years beginning on or after January 1, 2014. Read TaxNewsFlash-United States (September 13, 2013).

Rev. Proc. 2014-16 [PDF 53 KB] modifies the procedures for obtaining the automatic consent of the Commissioner for certain changes in methods of accounting for amounts paid to acquire, produce, or improve tangible property.

Rev. Proc. 2014-16 also provides procedures for obtaining automatic consent to change to (1) a reasonable method described in section 1.263A-1(f)(4) of the regulations for self-constructed assets, and (2) a permissible method under section 263A(b)(2) of the Code and Reg. section 1.263A-3(a)(1) for certain costs related to real property acquired through a foreclosure or similar transaction.

Rev. Proc. 2014-16 does not address method changes under the proposed disposition regulations issued under section 168 of the Code. Those procedures are expected to be released in the near future.

Rev. Proc. 2014-16 will be published in Internal Revenue Bulletin 2014-07 on Feb. 10, 2014.

Key provisions

Rev. Proc. 2014-16 provides:

  • Except for certain changes requiring a modified section 481(a) adjustment (such as materials and supplies and transaction costs changes), changes under the repair regulations are generally made with a section 481(a) adjustment.

  • The scope limitations under section 4.02 of Rev. Proc. 2011-14 (e.g., taxpayers under examination, prior five-year changes, etc.) are generally waived for taxpayers making one or more covered method changes for tax years beginning before January 1, 2015.

  • Taxpayers making one or more of the covered changes related to the tangible property regulations are required to include in addition to all other information required on line 12 of Form 3115, the following:

    • The citation to the paragraph of the final tangible property regulations or temporary tangible property 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 under Reg. section 1.263(a)-3(e) (or Reg. section 1.263(a)-3T(e)) or, in the case of a building, is changing the identification of any building structure(s) or building system(s) under Reg. section 1.263-3(e)(2) (or Reg. section 1.263-3T(e)(2)) for purposes of determining whether amounts are deducted as repair and maintenance costs under Reg. section 1.162-4 (or Reg. section 1.162-4T) or capitalized as improvement costs under Reg. section 1.263(a)-3 (or Reg. section 1.263(a)-3T), 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 a detailed description of the unit(s) of property, building structure(s), and building system(s) 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.
  • Taxpayers are generally permitted to use statistical sampling in determining the section 481(a) adjustment for covered changes related to the tangible property regulations by following the guidance provided in Rev. Proc. 2011-42.

  • Rev. Proc. 2014-16 also provides reduced filing requirements for small taxpayers (average annual gross receipts of less than or equal to $10 million).

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