The IRS has issued proposed regulations to implement the various small business optional accounting rules added to IRC §§263A, 448, 460 and 471 by the Tax Cuts and Jobs Act (TCJA).[1] These rules are generally available to small businesses that are not tax shelters and have average annual gross receipts in the preceding three years not in excess of an amount annually adjusted for inflation. For 2020 the revenue limit is $26 million.[2]

Qualifying entities are:

• Allowed to use the cash basis of accounting (any change of method is treated as a change initiated by the taxpayer and made with the consent of the IRS). [IRC §448(b)(3), (d)(7)]

• Allowed to be exempt from the application of the uniform capitalization rules of IRC §263A [IRC §263A(i)]

• Allowed to be exempt from the requirement to keep inventories under the rules of §471(a) (though such items must either be tracked as if they were non-incidental supplies or treated in conformity with the entity’s applicable financial statement/books and records if no AFS exists). [IRC §471(c)]

• Treated as meeting the gross receipts requirement to be treated as a small contractor exempt from the percentage of completion method (this does not impact the second requirement that the expected length of contracts must also be less than 2 years to be exempt from percentage of completion). [IRC §460(e)(1)(B)]

Any change of method required for the above is treated as a change initiated by the taxpayer and made with the consent of the IRS for purposes of IRC §481.

The IRS announced[1] that the agency is going to be accepting the duplicate copy of Form 3115, Application for Change in Accounting Method, a taxpayer is required to file as part of a request for an automatic method change via fax beginning on July 31, 2020.

The website provides the following general information:

Until further notice, the IRS is implementing the temporary procedure described below for fax transmission of the duplicate copy of Form 3115, Application for Change in Accounting Method.

Starting on July 31, 2020, the IRS will accept the duplicate copy of Form 3115, Application for Change in Accounting Method, via fax to 844-249-8134. Important note: This change applies only to taxpayers requesting consent to make a change in accounting method under the automatic change procedure. This temporary procedure is in effect until further notice.

Taxpayers will still need to submit two copies of the Form 3115 to the IRS. Taxpayers must continue to file Form 3115 with their tax return (including extensions). However, instead of mailing the duplicate paper copy of Form 3115 to the IRS in Ogden, Utah, taxpayers can now fax it to 844-249-8134.

In what now appears to be an annual event, the IRS has released a revised comprehensive list of accounting method changes in Rev. Proc. 2017-30.  The new ruling replaces Rev. Proc. 2016‑29, issued approximately one year earlier.

The document is 337 pages long in the original PDF format published by the IRS.  The significant changes section begins on page 325 and continues through to page 330 of the document.  The new revenue procedure is effective for a Form 3115 filed on or after April 19, 2017 for a year of change ending on or after August 31, 2016.

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One of the key developments keeping those CPAs who specialize on the “accounting and auditing” (or A&A as we tend to refer to it) side of the profession jumping has been the soon to be implemented standard titled “Revenue from Contracts with Customers” FASB Accounting Standards Update 2014-09, which makes significant changes to revenue recognition, particularly the timing of such recognition of revenue. 

Of course, for those of us working in the tax arena, when you start talking about timing of recognition you realize that if any of this either does flow onto a tax return or a taxpayer reasonably would like to have it do so to keep tax and book the same in this area you realize you are dealing with an “accounting method” which would require IRS permission to change under IRC §446.  And we also realize the timing of the inclusion of an item of income is governed under the IRC by IRC §451.

The IRS has been aware of this potential problem as well, and now has released a proposed Revenue Procedure to allow for certain automatic changes in accounting methods.  This proposed procedure, on which the IRS is seeking comments, is found in IRS Notice 2017-17.

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When the IRS issued the list of automatic accounting method changes as a separate Revenue Procedure in Revenue Procedure 2015-13 in early 2015 rather than as an appendix to the general Revenue Procedure in accounting method changes, the clear implication was that this would allow the IRS to issue a comprehensive list of changes on a more regular basis.  Revenue Procedure 2016-29 is the first time the IRS takes advantage of this structure, creating a comprehensive list of automatic changes, update for new automatic changes issued since Revenue Procedure 2015-13, superseding that procedure and incorporating changes made since the issuance of that procedure.

Following the issuance of Revenue Procedure 2015-13, the IRS had issued modifications/additions to the automatic list in Revenue Procedures 2015-33 and Revenue Procedure 2016-1.  Thus to obtain the complete list of automatic changes and current rules an adviser would need to check Revenue Procedure 2015-13 along with those changes.  

The IRS announced that, for forms filed on or before April 19, 2016, the agency will generally accept either the current December 2015 version of Form 3115 or the prior December 2009 version of the form [Announcement 2016-14].  However, the use of the new form will be mandated in those situations where situations where the IRS has mandated the use of new form specifically in guidance published in the Internal Revenue Bulletin.

In the vast majority of cases the form is being filed to be granted automatic consent to a change in method of accounting under provisions promulgated by the IRS well before the December 2015 form was published, so this relief will cover the vast majority of filings, albeit only for a relative short period (on April 19 the new form will become mandated)