The IRS recently released Rev. Proc. 2016-29, which lists automatic method changes and provides procedures for making them. Form 3115’s filed on or after May 5, 2016 must follow the updated rules.
Background. Taxpayers make accounting method changes for numerous reasons, such as claiming missed depreciation from a Cost Segregation study, reclassifying capital expenditures as immediately deductible repairs, or claiming the §179D Energy Efficient Commercial Building deduction on a prior-year improvements.
Taxpayers must obtain IRS consent when changing a method of accounting by using Form 3115. While the Form 3115 instructions provide guidance, taxpayers must rely on the most current revenue procedures detailing rules for the specific accounting method change they are requesting.
What’s New. Rev. Proc. 2016-29 modifies, amplifies, and in part supersedes Rev. Proc. 2015-14 as well as other revenue procedures covering accounting method changes. This revenue procedure makes clean-ups, such as removing now obsolete method changes or eliminating reference to the expired proposed Tangible Property Regulations. It also provides new guidance for accounting method changes under the final Tangible Property Regulations. Additional items of note for real estate owners include:
- Section 6.01, relating to impermissible to permissible methods of depreciation or amortization, makes clear that depreciation changes are not automatic for property where the taxpayer has previously taken a federal income tax credit.
- Section 11.08, relating to changes for tangible property, provides that the section does not apply to amounts paid or incurred for repair and maintenance costs that the taxpayer is changing from capitalizing to deducting and for which the taxpayer has claimed a federal income tax credit or elected to apply Code Sec. 168(k)(4).
- Section 6.20, relating to the revocation of a partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that such revocation must be made, and the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply, for any taxable year beginning after December 31, 2013, and ending before December 31, 2016.
- Section 11.10, relating to the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply for any taxable year beginning after December 31, 2013, and ending before December 31, 2016.
KBKG Insight: In some cases, federal tax credits are available for certain types of qualified investments based upon a taxpayer’s basis in such property. Generally the qualified investment must meet certain criteria and have specific tax attributes, such as a particular depreciable life. Since retroactively changing a depreciable life may reduce the amount of the credit previously taken, an automatic method change is not allowed. For example, a Cost Segregation study is not advised on property in which a federal Historic Tax credit has been claimed. Because the Historic Tax credit is calculated on the basis in Section 1250 real property, lowering the taxpayer’s basis in Section 1250 real property would result in less Historic Tax credits.
Authors: Alex Bagne CCSP, JD, MBA and Lester Cook CCSP, ASA