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IRS Updates Procedure for Elections under New Capitalization Rules.
(Parker Tax Publishing March 2, 2014)

The IRS issued a revised version of Rev. Proc. 2014-16, relating to procedures for electing changes in method of accounting relating to the final capitalization rules, which contains some clarifications to an earlier released version of the procedure. Rev. Proc. 2014-16.

Last September, the IRS issued final regulations that address when amounts paid to acquire, produce, or improve tangible property must be capitalized. The final regulations are generally effective for tax years beginning on or after January 1, 2014, but may be adopted for earlier years under certain circumstances. There are many favorable methods and safe harbors in the final capitalization regulations that taxpayers may want to adopt. To do so, however, taxpayers must file for an accounting method change. While the IRS is granting automatic consent to change to many of these new methods, Form 3115, Application for Accounting Method Change, must still be filed and the appropriate procedures followed. Generally, the procedures to be filed for accounting method changes are contained in Rev. Proc. 2011-14. In January, the IRS issued an advanced version of Rev. Proc. 2014-16, which advised taxpayers on the procedures for making such accounting method changes. Rev. Proc. 2014-16 modifies the procedures in Rev. Proc. 2011-14.

The IRS has now published Rev. Proc. 2014-16 in the Internal Revenue Bulletin dated February 24, 2013. This newer version of Rev. Proc. 2014-16 contains some clarifications that were not in the earlier version.

Specifically, the revised version contains a clarification that taxpayers should not net the Code Sec. 481(a) changes when submitting a Form 3115 for more than one accounting method change under the new capitalization regulations. The earlier version of Rev. Proc. 2014-16 provided a change to the Appendix of Rev. Proc. 2011-14 that said that:

A taxpayer that wants to make one or more changes in method of accounting pursuant to this section 10.11 of the APPENDIX relating to the same identified unit of property or, in the case of a building, the same identified building structure or building system should file such change on the same Form 3115 and provide a single section 481(a) adjustment for all the changes related to the identified property. If one or more changes related to the identified property generate a negative section 481(a) adjustment and other changes related to the same identified property generate a positive section 481(a) adjustment, the taxpayer may provide a single negative section 481(a) adjustment for all the changes related to the identified property generating such negative adjustment and a single positive adjustment for all the changes related to the identified property generating such positive adjustment.

The revised version of Rev. Proc. 2014-16 simply provides:

Except as provided in paragraph 10.11(6)(b) of this APPENDIX, a taxpayer changing to a method of accounting provided in Section 10.11 of this APPENDIX must apply section 481(a) and take into account any applicable section 481(a) adjustment in the manner provided in sections 5.03 and 5.04 of this revenue procedure.

The reference above to "this revenue procedure" refers to Sections 5.03 and 5.04 in Rev. Proc. 2011-14, the revenue procedure that Rev. Proc. 2014-16 is updating.

The updated procedure also clarifies, in Section 11.09(1)(a), that the change to a reasonable allocation method described in Reg. Sec. 1.263A-1(f)(4) does not apply to all property, but rather applies just to self-constructed assets.

For a discussion of the rules relating to Code Sec. 481 adjustments when changing a method of accounting, see Parker Tax ΒΆ241,595. (Staff Contributor Parker Tax Publishing)

Also see IRS Updates Accounting Method Procedure for Adopting Favorable Capitalization Rules.

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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