IRS Updates Accounting Method Procedure for Adopting Favorable Capitalization Rules

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Last September, the IRS issued final regulations which 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. The IRS also issued proposed regulations on dispositions of MACRS property and general asset accounts, which were expected to be finalized before 2014. Once those regulations are finalized, taxpayer will have the choice of applying them to years beginning on or after January 1, 2014, or for earlier years if certain conditions are met.

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. Last week, the IRS issued Rev. Proc. 2014-16, which updates the procedures for making such accounting method changes. Rev. Proc. 2014-16 also includes new procedures for changing to a reasonable cost allocation method for allocating direct and indirect costs to certain property and for changing the method of accounting for costs associated with foreclosures or similar transactions. Finally, for certain small taxpayers, the amount of detail required when filing the Form 3115 is reduced.

For questions regarding this IRS Final Regulation and its impact on your company, please feel free to contact our office.

Thank you,
Mark A. Wilging, CPA, Partner