On May 10, 2018, the Internal Revenue Service (IRS) released Rev. Proc. 2018-31, which provides an updated list of automatic changes in methods of accounting. As was the case with its predecessor, Rev. Proc. 2017-30, the list of automatic accounting method changes remain governed by the automatic change procedures of Rev. Proc. 2015-13. Rev. Proc. 2018-31 is effective for any Forms 3115 filed on or after May 9, 2018, for a year of change ending on or after September 30, 2017. As highlighted by comments from representatives of the IRS National Office at last week’s ABA Section of Tax meeting, Rev. Proc. 2018-31 was aimed at addressing “housekeeping issues” to release automatic accounting method change guidance for the 2017 filing season. The IRS National Office is planning to address accounting method change issues arising under tax reform separately. With that in mind, Rev. Proc. 2018-31 modifies its predecessor, Rev. Proc. 2017-30, primarily by removing certain paragraphs or sections that are now obsolete subsequent to tax reform. These revisions to Rev. Proc. 2017-30 include:
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Section 6.11, relating to a change in the depreciation of leasehold improvements, is modified to remove paragraph (2)(b), relating to the temporary waiver of the eligibility rule in § 5.01(1)(f) of Rev. Proc. 2015-13, because it is obsolete;
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Section 6.18, relating to the revocation of the partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is obsolete and is removed from the revenue procedure in its entirety;
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Section 11.10, relating to a change to the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to remove paragraph (2), relating to the temporary waiver of the eligibility rules in §§ 5.01(1)(d) and (f) of Rev. Proc. 2015-13, because they are obsolete;
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Because of amendments made to §§ 263A, 448 and 471 by the TCJA, § 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified to provide that a small reseller, as defined in § 12.01(3)(b) of Rev. Proc. 2018-31, is not permitted to make a change in method of accounting described in § 12.01(1)(a)(i) of Rev. Proc, 2018-31 for any tax year beginning after December 31, 2017; and, § 15.03, relating to taxpayers changing to overall cash method, and § 21.03 (now § 22.03 of Rev. Proc. 2018-31), relating to the small taxpayer exception from requirement to account for inventories under § 471, are modified to provide that these changes do not apply for any tax year beginning after December 31, 2017;
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Because of the amendments made to § 118 by the TCJA, § 15.14, relating to non-shareholder contributions to capital, is modified to provide that the change described in § 15.14(1)(a)(ii) does not apply to contributions made after December 22, 2017;
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Pursuant to Notice 2018-35, § 16.07, relating to changes for advance payments, is modified to provide that the eligibility rule in § 5.01(1)(f) of Rev. Proc. 2015-13, does not apply to a taxpayer that changes to a method of accounting provided under § 16.07(1)(a)(i) of Rev. Proc. 2018-31 for the taxpayer’s first or second tax year ending on or after May 9, 2018;
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Because of the amendments made to § 451 by the TCJA, § 16.07 also is modified to provide that a taxpayer is not permitted to make a change in method of accounting described in § 16.07(1)(a)(ii) of Rev. Proc. 2018-31 for any tax year beginning after December 31, 2017;
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Section 21.15 (now § 22.15 of Rev. Proc. 2018-31), relating to sales-based vendor chargebacks, is modified to remove paragraph (2), relating to the temporary waiver of the eligibility rule in § 5.01(1)(f) of Rev. Proc. 2015-13, because it is obsolete;
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Section 23.01 (now § 24.01 of Rev. Proc. 2018-31), relating to certain taxpayers that have elected the mark-to-market method of accounting under § 475(e) or (f), is modified to provide that the waiver of the eligibility rule in § 5.01(1)(f) of Rev. Proc. 2015-13 no longer applies to this change. The waiver of the eligibility rule in § 5.01(1)(d) of Rev. Proc. 2015-13 continues to apply to this change; and,
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Section 23.02 (now § 24.02 of Rev. Proc. 2018-31), relating to a taxpayer changing its method of accounting for securities or commodities from the mark-to-market method of accounting described in § 475 to a realization method of accounting, is modified to provide that the waiver of the eligibility rule in § 5.01(1)(f) of Rev. Proc. 2015-13 no longer applies to this change. The waiver of the eligibility rule in § 5.01(1)(d) of Rev. Proc. 2015-13 continues to apply to this change.
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Eversheds Sutherland Observation: Now that Rev. Proc. 2018-31 has been released and we have been informed which obsolete provisions from Rev. Proc. 2017-30 have been removed, taxpayers should reconsider the updated list of automatic accounting method changes to take full advantage of the TCJA’s reduced corporate tax rate from 35% to 21% for years beginning after December 31, 2017. There are multiple taxpayer-favorable automatic accounting method changes that may be filed with a taxpayer’s 2017 Federal income tax return to accelerate deductions into 2017 (or defer income into 2018) to take advantage of the rate changes. Although accounting method changes generally result in only a temporary benefit, as a result of the tax reform rate reduction, automatic accounting method changes filed with 2017 returns produce permanent benefits. A few of these changes in Rev. Proc. 2018-31 include:
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Tangible property under § 11.08 (including, but not limited to, repair and maintenance costs, incidental materials & supplies, non-incidental materials & supplies, retables & temporary spare parts, and other changes related to implementing the tangible property regulations);
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Depreciation under § 6;
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Customer rebates and allowances under § 20.07;
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Accrued compensation under § 20.01;
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Prepaid recurring liabilities under § 20.11; and
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Advance payment under § 16.07.
By changing to one of the accounting methods referenced above, a taxpayer may be able to either: (1) accelerate deductions into 2017 and recognize a greater benefit due to the higher tax rate; or (2) defer income into 2018 (and subsequent tax years) that will tax such income at a lower rate. Because these automatic accounting method changes must be filed with a taxpayer’s timely filed (including any extension) original federal income tax return, companies still have several months to review Rev. Proc. 2018-31, consider making such changes, and complete the requisite documentation to effectuate the change with their 2017 returns filed this fall.
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