On December 20, 2016, the Internal Revenue Service (the Service) issued Notice 2017-6, which provides relief for a taxpayer seeking to change accounting methods in connection with the final tangible property regulations (often referred to as the repair regulations) and certain other related provisions. The repair regulations encompass Treas. Reg. § 1.263(a)-1, Treas. Reg. § 1.263(a)-2, and Treas. Reg. § 1.263(a)-3 (T.D. 9636; September 19, 2013), and certain related final Modified Accelerated Cost Recovery System (MACRS) regulations (T.D. 9689; August 14, 2014). Specifically, the Notice extends the waiver of the five-year eligibility limitation allowing taxpayers to file automatic accounting method changes. For taxpayers subject to the five-year eligibility limitation that have yet to comply with the final repair regulations and those seeking certain accounting method changes arising under the repair regulations, this Notice provides welcome relief.
Background Regarding the Five-Year Eligibility Limitation
As a general rule, the Service prohibits taxpayers from filing a change in accounting method for an item using the automatic consent procedures if the taxpayer has made or requested an accounting method change for the same item during any of the five tax years ending with the year of change. There is concern that multiple accounting method changes involving the same item in a contracted time frame may be abusive. Consequently, when a taxpayer is subject to the five-year eligibility limitation, the only way to effect an accounting method change is with a non-automatic accounting method change, otherwise known as an accounting method change requiring advance consent, which is described generally in Rev. Proc. 2015-13, I.R.B. 2015-5, 419. Non-automatic accounting method changes are filed with the IRS National Office, require actual IRS consent and payment of a filing fee, and resolution may be protracted. Not surprisingly, both taxpayers and the Service generally prefer automatic accounting method changes to non-automatic ones.
Because it took a number of years to finalize the repair regulations, many taxpayers filed accounting method changes in response to temporary guidance and/or expected final guidance during the five years leading to finalization. As a result, these taxpayers faced the five-year eligibility limitation when the final repair regulations were published. For this reason, the Service included a temporary waiver of the five-year limitation in Section 5.01(1)(f) of Rev. Proc. 2015-13, such that the limitation did not apply to accounting method changes filed in tax years beginning before January 1, 2016, and thus, accounting method changes required to comply with the final repair regulations could be filed automatically. Unfortunately, however, taxpayers that failed to timely comply with the repair regulations and/or taxpayers that filed hastily and seek to make subsequent changes to previous accounting method changes find that such changes are not available automatically and that they must file these accounting method changes non-automatically. The Notice provides relief by allowing these taxpayers to now file accounting method changes automatically.
Analysis of the Notice
The Notice extends the waiver of the five-year eligibility limitation to accounting method changes made for tax years beginning before January 1, 2017. The eligibility rule of Section 5.01(1)(d) of Rev. Proc. 2015-13 is waived for accounting method changes to comply with the repair regulations. For taxpayers that have yet to comply with these final rules, the extended waiver is a welcome relief. Compliance would otherwise have required filing a non-automatic accounting method change.
Additionally, the Notice provides a one-year extension of the waiver to the following accounting method changes under the repair regulations and related MACRS regulations:
(1) Section 6.14, relating to a change from a permissible to another permissible method of accounting for depreciation of MACRS property under Treas. Reg. § 1.168(i)-1 (relating to general asset accounts), Treas. Reg. § 1.168(i)-7 (relating to item accounts), and Treas. Reg. § 1.168(i)-8 (relating to dispositions), as applicable;
(2) Section 6.15, relating to a change in method of accounting for dispositions of a building or structural component under Treas. Reg. § 1.168(i)-8;
(3) Section 6.16, relating to a change in method of accounting for dispositions of tangible depreciable assets (other than a building or its structural components) under Treas. Reg. § 1.168(i)-8; and
(4) Section 6.17, relating to a change in method of accounting for dispositions of tangible depreciable assets in a general asset account under Treas. Reg. § 1.168(i)-1.
A taxpayer that filed a non-automatic accounting method change before December 20, 2016, under the advance consent procedures may now seek that accounting method change automatically if: (i) the request is still pending with the IRS National Office on December 20, 2016, and (ii) the taxpayer converts to the automatic change procedures before the later of January 19, 2017, or the date the IRS National Office rules on the original request.
In the Notice, the Service provides two reasons for the additional time: taxpayer convenience and administrative burden. First, it is apparent the Service has received a significant number of taxpayer requests for advance consent accounting method changes to implement the final repair regulations. The Service granted an additional year in an effort to simplify and facilitate taxpayers’ transition to the final repair regulations.
Second, the Service indicated in the Notice that the transition relief will reduce its own administrative burden. Taxpayers that failed to timely implement the final repair regulations were required to seek a non-automatic accounting method change. Although not explicitly stated, the Service may not have anticipated the number of taxpayers that would request an advance consent ruling. By extending the waiver of the five-year eligibility limitation, the Service has reduced or eliminated the need for taxpayers to request non-automatic accounting method changes in this area.
The effective date of Notice 2017-6 is December 20, 2016, and taxpayers that have yet to file method changes related to the final tangible property, depreciation or disposition regulations should revisit implementation of these final regulations in light of this opportunity provided by this extension of the waiver of the eligibility rule.