SECTION 14. METHODS OF

ACCOUNTING (§ 446)

.01 Change in overall method from the cash method to an accrual method .

(1) Description of change . (a) Applicability . This change applies to a taxpayer that wants to change its overall method of accounting from the cash receipts and disbursements method (cash method) (as defined in section 14.01(2)(a) of this revenue procedure) to an accrual method (as defined in section 14.01(2)(b) of this revenue procedure). A

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cedure) and is either adopting this special method or qualifies to change to this special method using the automatic change procedures of Rev. Proc. 2015–13 and a section of this revenue procedure, or the change can be made automatically under any section of the Code or regulations, or other guidance published in the IRB (see Rev. Rul. 90–38 (regarding when a taxpayer may adopt a method of accounting));

Also, a taxpayer qualifies to use this section 14.01 when that taxpayer, in the taxable year immediately preceding the year of change, has used a permissible inventory method for that year, and, if that taxpayer was subject to § 263A for that year, has also used a permissible § 263A method for that year, and the method(s) continue to be used for the year of change.

(b) Inapplicability . This change does not apply to:

(i) a taxpayer that is making a change from a hybrid method of accounting (as defined in section 14.01(2)(e) of this revenue procedure);

(ii) a taxpayer that is changing its method of accounting for one or more items of income or expense, but not its overall method of accounting. See section 14.09 of this revenue procedure for a description of accounting method changes from the cash method to an accrual method for specific items that are to be made using the automatic change procedures of Rev. Proc. 2015–13 and that section 14.09;

(iii) a taxpayer that is required by the Code, regulations, or other guidance published in the IRB to use a special method (for example, an inventory method, a § 263A method, or a long-term contract method) in the year of change and fails to adopt or change to that method;

(iv) a taxpayer that is engaged in two or more trades or businesses, unless that taxpayer makes this change for each trade or business so that the identical accrual method is used for each trade or business beginning with the year of change;

(v) a taxpayer that is required by § 447 to change to an accrual method when the year of change is the first taxable year that taxpayer is required by § 447 to change to that method;

(vi) a cooperative organization described in §§ 501(c)(12), 521, or 1381; or

(vii) an individual taxpayer, except for activities conducted as a sole proprietorship.

(2) Definitions . (a) Cash method of accounting is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). For purposes of this section 14.01, the cash method also includes the overall cash method with inventoriable items treated as either inventory or as non-incidental materials and supplies under § 1.162–3 as permitted by Rev. Proc. 2001–10, 2001–1 C.B. 272, as modified by Rev. Proc. 2011–14, 2011–4 I.R.B. 330, or Rev. Proc. 2002–28, 2002–1 C.B. 815, as modified by Rev. Proc. 2011–14. (b) Accrual method of accounting is a method identified by § 446(c)(2) and §§ 1.446–1(c)(1)(ii), 1.451–1(a), and 1.461–1(a)(2). (c) Recurring item exception is the method described in § 461(h)(3) and § 1.461–5.

(d) Special method of accounting within the meaning of this section 14.01 is a method of accounting, other than the cash method, expressly permitted or required by the Code, regulations, or in other guidance published in the IRB that deviates from the tax accrual accounting rules of §§ 446, 451 and 461 and the regulations thereunder. For example, the installment method of accounting under § 453, the mark-to-market method under § 475, a long-term contract method such as the percentage of completion method under § 460, and the deferral method of Rev. Proc. 2004–34, 2004–1 C.B. 991, as clarified and modified by Rev. Proc. 2011–18, 2011–5 I.R.B. 443, and Rev. Proc. 2013–29, 2013–33 I.R.B. 141, and as modified by Rev. Proc. 2011–14, are special methods of accounting. In contrast, application of the all-events test under a specific set of facts is not a special method of accounting. See, for example, Rev. Rul. 69–314, 1969–1 C.B. 139 (concerning the treatment of retainages).

(e) Hybrid method of accounting is a combination of the cash and accrual methods under which one or more items of income or expense are reported on the cash method and one or more items of income or expense are reported on an accrual method. For purposes of this section 14.01, a hybrid method of accounting in

cludes, for example, a taxpayer that uses an accrual method with respect to purchases and sales of inventories and uses the cash method in computing all other items of income and expense.

(3) Manner of making change . (a) Section 481(a) adjustment . A taxpayer changing its method of accounting under this section 14.01 must compute a § 481(a) adjustment. This adjustment must reflect the account receivables, account payables, inventory, and any other item determined to be necessary in order to prevent items from being duplicated or omitted. However, the adjustment does not include any item of income accrued but not received that was worthless or partially worthless (within the meaning of § 166(a)) on the last day of the year immediately prior to the year of change.

(b) Prior change eligibility rule inap- plicable . Any prior change to the overall cash method that the taxpayer implemented using the provisions of Rev. Proc. 2001–10, as modified by Rev. Proc. 2011– 14, or Rev. Proc. 2002–28, as modified by Rev. Proc. 2011–14, is disregarded for purposes of section 5.01(1)(e) of Rev. Proc. 2015–13.

(c) Adoption of recurring item excep- tion . The taxpayer must attach to its Form 3115 a statement describing the types of liabilities for which the recurring item exception will be used.

(d) Concurrent automatic change to a special method .

(i) Generally only one Form 3115 re- quired . Except as provided in section 14.01(3)(d)(ii) of this revenue procedure, a taxpayer that is changing from the overall cash method to an overall accrual method under this section 14.01 and changing to a special method, as permitted under section 14.01(1)(a)(ii), (iii), or (iv), must timely file a single Form 3115 for both changes and must enter the designated automatic accounting method change numbers for both changes on the appropriate line of that Form 3115. For example, a taxpayer making both a change from the overall cash method to an overall accrual method under this section 14.01 and an automatic change to the deferral method for advance payments under Rev. Proc. 2004–34 ( see section 15.07 of this revenue procedure) must timely file a single Form 3115 for both changes and enter

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the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015–13 for information on making concurrent changes.

(ii) Two Forms 3115 required when a concurrent change is being implemented under section 33.01 of this revenue pro- cedure for short-term obligations . When a taxpayer subject to § 1281 is changing its method of accounting for interest income on short-term obligations as part of the change to an overall accrual method under this section 14.01, that taxpayer must request the change for the interest income under section 33.01 of this revenue procedure. The taxpayer must timely file individual Forms 3115 for each change requested. This section 14.01 will govern the change to an overall accrual method.

(e) Concurrent change in accounting method not permitted to be implemented using the automatic change procedures of Rev. Proc. 2015–13 and a section of this revenue procedure, any section of the Code or regulations, or other guidance published in the IRB . A taxpayer that does not qualify to change from the overall cash method to an overall accrual method under this section 14.01 because that taxpayer is concurrently changing to a method of accounting that may not be implemented using the automatic change procedures of Rev. Proc. 2015–13 and a section of this revenue procedure, any section of the Code or regulations, or other guidance published in the IRB, must timely request both changes using the non-automatic change procedures in Rev. Proc. 2015–13. See Rev. Proc. 2015–1, 2015–1 I.R.B. 1 (or successor), for more information on whether one Form 3115 is required to implement the changes, and for information on the appropriate user fee.

(4) Change made in the first § 448 year.

(a) In general . If the year of change is the first § 448 year for a taxpayer and that taxpayer qualifies to make the change from the cash method under the provisions of §§ 1.448–1(g) and (h) as well as this section 14.01, that taxpayer may choose to make the change using this section 14.01. However, that taxpayer must still comply with the requirements and

provisions of §§ 1.448–1(g) and (h) in addition to the requirements and provisions of this section 14.01. For example, if the taxpayer is a hospital, defined in § 1.448–1(g)(2)(ii)(B), and that taxpayer chooses to make its change from the cash method for the first § 448 year using this section 14.01, the applicable § 481(a) adjustment period is provided by § 1.448– 1(g)(2)(ii). If a taxpayer chooses not to implement its change from the cash method using this section 14.01, that taxpayer must make the change under the provisions of §§ 1.448–1(g) and (h).

(b) Prior change eligibility rule inap- plicable . For a taxpayer making a change from the cash method in the first § 448 year, any prior change to the overall cash method is disregarded for purposes of section 5.01(1)(e) of Rev. Proc. 2015–13.

(5) Designated automatic accounting method change number .

(a) Change made in the first § 448 year . The designated automatic accounting method change number for a change from the cash method in the first § 448 year is “123.” Entering designated automatic accounting method change number “123” on the appropriate line on the Form 3115 fulfills the requirement of § 1.448– 1(h)(2)(i) to type or print “Automatic Change to Accrual Method – Section 448” at the top of page 1 of the Form 3115.

(b) All other changes from the cash method to an overall accrual method . The designated automatic accounting method change number for all other changes from the cash method under this section 14.01 is “122.”

(6) Contact information . For further information regarding a change under this section, contact Cheryl Oseekey, at (202) 317-7007 (not a toll-free number). .02 Multi-year insurance policies for multi-year service warranty contracts .

(1) Description of change . (a) Applicability . This change applies to a manufacturer, wholesaler, or retailer of motor vehicles or other durable consumer goods that wants to change its method of accounting for insurance costs paid or incurred to insure its risks under multi-year service warranty contracts to the method described in section 14.02(2) of this revenue procedure. Multi-year service warranty contracts to which this change applies include only those sepa

rately priced contracts sold by a manufacturer, wholesaler, or retailer also selling the motor vehicles or other durable consumer goods underlying the contracts (to the ultimate customer or to an intermediary). The classification of goods as “durable consumer goods” for purposes of this change depends on the common usage of the goods, rather than the purchaser’s actual intended use of the goods.

(b) Inapplicability . This change does not apply to a taxpayer that covers its risks under its multi-year service warranty contracts through arrangements not constituting insurance.

(2) Description of method . If a taxpayer purchases a multi-year service warranty insurance policy (in connection with its sale of multi-year service warranty contracts to customers) by paying a lumpsum premium in advance, the taxpayer must capitalize the amount paid or incurred and may only obtain deductions for that amount by prorating (or amortizing) it over the life of the insurance policy (whether the cash method or an accrual method of accounting is used to account for service warranty transactions).

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.02 is “31.” (4) Contact information . For further information regarding a change under this section, contact Erika Reigle, at (202) 317-5100 (not a toll-free number). .03 Taxpayers changing to overall cash method .

(1) Description of change . This change applies to either:

(a) a “qualifying taxpayer” that qualifies to make the change to the overall cash receipts and disbursements (cash) method under Rev. Proc. 2001–10, 2001–1 C.B. 272, (other than a taxpayer described in § 448(a)(3) or a bank described in section 14.12(2)(a) of this revenue procedure) with “average annual gross receipts” (as defined in section 5.01 of Rev. Proc. 2001–10) of $1,000,000 or less that wants to change to the overall cash method of accounting as provided in Rev. Proc. 2001–10, as modified by Announcement 2004–16, 2004–1 C.B. 668 (regarding placement of § 481(a) adjustment on the Form 3115), and Rev. Proc. 2011–14,

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2011–4 I.R.B. 330 (removing § 6.02(1)(a) of Rev. Proc. 2001–10); or

(b) a “qualifying small business taxpayer” that qualifies to make a change to the overall cash receipts and disbursements (cash) method under Rev. Proc. 2002–28, 2002–1 C.B. 815, (other than a taxpayer prohibited from using the cash method under § 448 or a bank described in section 14.12(2)(a) of this revenue procedure) with “average annual gross receipts” (as defined in section 5.02 of Rev. Proc. 2002–28) of $10,000,000 or less that wants to change the overall method of accounting for an “eligible trade or business” (as defined in section 4.01 of Rev. Proc. 2002–28) to the overall cash method of accounting as provided in Rev. Proc. 2002–28, as modified by Announcement 2004–16 (regarding placement of § 481(a) adjustment on the Form 3115), and Rev. Proc. 2011–14 (removing § 7.02(1)(a) of Rev. Proc. 2002–28).

(2) Manner of making change . See either Rev. Proc. 2001–10 or Rev. Proc. 2002–28 for additional guidance on the computation of the § 481(a) adjustment and the completion of the Form 3115.

(3) Concurrent automatic change to treat inventoriable items as nonincidental materials and supplies under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 . A taxpayer making both a change to the overall cash method under this section 14.03 and a change to treat inventoriable items as materials and supplies that are not incidental pursuant to § 1.162–3 under section 21.03 of this revenue procedure for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for information on making concurrent changes.

(4) Banks changing to overall cash/ hybrid method . This change does not apply to a bank described in section 14.12(2)(a) of this revenue procedure. However, such a bank may be eligible to change to the overall cash/hybrid method under section 14.12 of this revenue procedure if it meets the requirements of that section.

(5) Farming businesses changing to overall cash method . A farming business may be eligible to make this change under section 14.03(1)(a) of this revenue procedure. However, a farming business is not eligible to make this change under section 14.03(1)(b) of this revenue procedure. A farming business that is not eligible under this section 14.03 may still be eligible to change to the overall cash method under section 14.13 of this revenue procedure if it meets the requirements of that section.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.03(1)(a) of this revenue procedure is “32.” The designated automatic accounting method change number for a change under section 14.03(1)(b) of this revenue procedure is “33.”

(7) Contact information . For further information regarding a change under this section, contact Neville R. Jiang at (202) 317-7007 (not a toll-free number). .04 Nonaccrual-experience method . (1) Description of change . (a) Applicability . This change applies to a taxpayer that wants to make one or more of the changes in method of accounting to, from, or within a nonaccrualexperience (NAE) method of accounting that are described in sections 3.01(1) through (5) of Rev. Proc. 2006–56, 2006–2 C.B. 1169, as modified by Rev. Proc. 2011–14, 2011–4 I.R.B. 330, and as modified and amplified by Rev. Proc. 2011–46, 2011–42 I.R.B. 518. (b) Inapplicability . This change does not apply to a taxpayer within the scope of section 3.01(6) through 3.01(8) of Rev. Proc. 2006–56, as modified and amplified by Rev. Proc. 2011–46.

(2) Manner of making the change . (a) Changes made with a § 481(a) ad- justment . A change in method of accounting described in section 3.01(1), (2), (3), or (5) of Rev. Proc. 2006–56, as modified and amplified by Rev. Proc. 2011–46, is made with a § 481(a) adjustment.

(b) Changes made on a cut-off basis . (i) In general . A change described in section 3.01(4) of Rev. Proc. 2006–56 is made on a cut-off basis and the new applicable period applies only to the taxpayer’s NAE calculation of its uncollectible amount for the year of change and for

subsequent years. Moreover, a change described in sections 5.02 and 5.03 of Rev. Proc. 2011–46 is made on a cut-off basis and the proposed method applies only to accounts receivable earned on or after the first day of the year of change. Accordingly, a § 481(a) adjustment is neither permitted nor required for a change described in section 3.01(4) of Rev. Proc. 2006–56 or in section 5.02 or 5.03 of Rev. Proc. 2011–46.

(ii) Special filing rules for changes made under section 5.02 and 5.03 of Rev. Proc. 2011–46, as modified by this reve- nue procedure .

(A) Certain eligibility rule inapplica- ble . The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, does not apply to a change in method of accounting made under section 5.02 or 5.03 of Rev. Proc. 2011–46, as modified by this revenue procedure.

(B) Filing rules . In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file a Form 3115 is waived and a statement in lieu of a Form 3115 is authorized for this change. Notwithstanding the definition of Form 3115 in section 3.07 of Rev. Proc. 2015–13, the statement in lieu of a Form 3115 that is permitted under section 5.02 or 5.03 of Rev. Proc. 2011–46 and this section 14.04 is considered a Form 3115 for purposes of the automatic consent procedures of Rev. Proc. 2015–13. However, the requirement to file the Ogden copy, under section 6.03(1)(a) of Rev. Proc. 2015–13, is waived. See section 5.02 or 5.03 of Rev. Proc. 2011–46, as applicable, for what information is required to be provided on the statement.

(3) Concurrent change to overall ac- crual method and a NAE method of ac- counting . A taxpayer making both an automatic change to, from, or within a NAE method of accounting under this section 14.04 and an automatic change to an overall accrual method under section 14.01 of this revenue procedure (whether or not it is the taxpayer’s first § 448 year), must file a single Form 3115 for both changes. The taxpayer must complete all applicable sections of Form 3115, including sections that apply to the change to an overall accrual method and to the change to a NAE method, and must enter the automatic accounting method change numbers

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for both changes on Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015–13 for information on making concurrent changes.

A taxpayer making both an automatic change to, from, or within a NAE method of accounting under this section 14.04 and a required change to an overall accrual method under § 448 (the taxpayer’s first § 448 year), and is either not eligible to make the change to an overall accrual method under section 14.01 of this revenue procedure or chooses to make the change to an overall accrual method using the procedures of § 1.448–1(h)(2), must make both changes (change to, from, or within a NAE method and change to an overall accrual method) on a single Form 3115. The taxpayer must follow the automatic change procedures of Rev. Proc. 2015–13 and this section 14.04 for the NAE change, and the procedures of § 1.448–1(h)(2) for the change to an overall accrual method (except that entering the designated automatic accounting method change number “34” on the Form 3115 fulfills the requirement of § 1.448– 1(h)(2) to type or print “Automatic Change to Accrual - Section 448” at the top of page 1 of the Form 3115). The taxpayer must complete all applicable sections of Form 3115, including sections that apply to the change to an overall accrual method and to the change to the NAE method and must enter the designated automatic accounting method change numbers for both changes on Form 3115.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change to, from, or within a NAE method of accounting under this section 14.04 is “35.”

(5) Contact information . For further information regarding a change under this section, contact Karla M. Meola, at (202) 317-7005 (not a toll-free number). .05 Interest accruals on short-term consumer loans—Rule of 78’s method .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting from the Rule of 78’s method to the constant yield method for stated interest (including stated interest that is original issue discount) on short-term consumer loans described in Rev. Proc. 83–40, 1983–1 C.B. 774,

which was obsoleted by Rev. Proc. 97–37, 1997–2 C.B. 455. (2) Background . (a) A short-term consumer loan is described in Rev. Proc. 83–40, provided:

(i) the loan is a self-amortizing loan that requires level payments, at regular intervals at least annually, over a period not in excess of five years (with no balloon payment at the end of the loan term); and

(ii) the loan agreement between the borrower and the lender provides that interest is earned, or upon the prepayment of the loan interest is treated as earned, in accordance with the Rule of 78’s method.

(b) In general, the Rule of 78’s method allocates interest over the term of a loan based, in part, on the sum of the periods’ digits for the term of the loan. See Rev. Rul. 83–84, 1983–1 C.B. 97, for a description of the Rule of 78’s method.

(c) In general, the constant yield method allocates interest and original issue discount over the term of a loan based on a constant yield. See § 1.1272–1(b) for a description of the constant yield method. The Rule of 78’s method generally frontloads interest as compared to the constant yield method.

(d) Rev. Proc. 83–40 was obsoleted because, under §§ 1.446–2 and 1.1272–1 (which were effective for debt instruments issued on or after April 4, 1994), taxpayers generally must account for stated interest and original issue discount on a debt instrument (loan) by using a constant yield method. As a result, the Rule of 78’s method is no longer an acceptable method of accounting for federal income tax purposes.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.05 is “71.” (4) Contact information . For further information regarding a change under this section, contact William E. Blanchard at (202) 317-3900 (not a toll-free number).

.06 Film producer’s treatment of cer- tain creative property costs .

(1) Description of change . This change applies to a taxpayer that wants to change the method of accounting for creative property costs to the safe harbor method provided by section 5 of Rev. Proc. 2004–

36, 2004–1 C.B. 1063. This safe harbor method of accounting applies to a taxpayer engaged in the trade of business of film production and to creative property costs (as defined in section 2.01 of Rev. Proc. 2004–36) properly written off by the taxpayer under The American Institute of Certified Public Accountants Statement of Position (SOP) 00–2, “Accounting for Producers or Distributors of Film.”

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.06 is “85.” (3) Contact information . For further information regarding a change under this section, contact Bernard Harvey at (202) 317-7005 (not a toll-free number). .07 Deduction of incentive payments to health care providers .

(1) Description of change . This change applies to a taxpayer that wants to change to the method of accounting for provider incentive payments under which those payments are included in discounted unpaid losses without regard to § 404, as provided in Rev. Proc. 2004–41, 2004–2 C.B. 90. A payment by a taxpayer to a health care provider is a “provider incentive payment,” and thus eligible for this treatment, if (a) the taxpayer is taxable as an insurance company under Part II of subchapter L; (b) the payment is made pursuant to a written agreement the purpose of which is to encourage participating health care providers to provide quality health care to the taxpayer’s subscribers in a cost-efficient manner; (c) the taxpayer’s liability for the payment is dependent on the attainment of one or more preestablished goals during a performance period consisting of not more than 12 consecutive months; (d) the terms of the arrangement pursuant to which the payment is made are established unilaterally by the taxpayer, and are not negotiated with the health care providers; (e) the taxpayer normally makes payments to health care providers under the arrangement within 12 months after the close of the performance period; (f) deferring the receipt of income by the health care provider or otherwise providing a tax benefit to the provider is not a principal purpose of the arrangement; (g) the taxpayer records a liability for the payment on its

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annual statement filed for state regulatory purposes, and includes this liability in the determination of discounted unpaid losses under § 846; and (h) the health care provider is not an employee, and is not providing health care as an agent, of the taxpayer. See Rev. Proc. 2004–41.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.07 is “90.” (2) Contact information . For further information regarding a change under this section, contact David Remus, at (202) 317-6995 (not a toll-free number). .08 Change by bank for uncollected interest .

(1) Description of change . This change applies to a “bank” as defined in § 1.166– 2(d)(4)(i) that: (a) uses an overall accrual method of accounting to determine its taxable income for federal income tax purposes; (b) is subject to supervision by Federal authorities, or by state authorities maintaining substantially equivalent standards; (c) has uncollected interest other than interest described in § 1.446–2(a)(2); and (d) has six or more years of collection experience. Under the safe harbor method of accounting provided by section 4 of Rev. Proc. 2007–33, 2007–1 C.B. 1289, a bank determines for each taxable year the amount of uncollected interest (other than interest described in § 1.446–2(a)(2)) for which it is considered to have a reasonable expectancy of payment by multiplying: (a) the total accrued (determined under § 1.446–2) but uncollected interest for the year, by (b) the bank’s “recovery percentage” (determined under section 4.02 of Rev. Proc. 2007–33) for that year. Solely for purposes of this safe harbor, the bank is not considered to have a reasonable expectancy of payment for the excess, if any, of the accrued but uncollected interest over the expected collection amount determined using the bank’s recovery percentage. The bank includes in gross income the portion of accrued but uncollected interest for which it has a reasonable expectancy of payment. The bank excludes from income the portion of accrued but uncollected interest for which it has no reasonable expectancy of payment.

(2) Recovery percentage . Subject to the limitations and conditions in Rev. Proc.

2007–33, sections 4.02(2), (3), and (4), a bank determines its recovery percentage for each taxable year by dividing: (a) total payments that the bank received on loans (including principal and interest) during the 5 taxable years immediately preceding the taxable year, by (b) total amounts that were due and payable to the bank on loans during the same 5 taxable years. The recovery percentage cannot exceed 100 percent and must be calculated to at least four decimal places. The data used in the recovery percentage must take into account acquisitions and dispositions. If a bank acquires the major portion of a trade or business of another person (predecessor) or the major portion of a separate unit of a trade or business of a predecessor, then in applying Rev. Proc. 2007–33 for any taxable year ending on or after the acquisition, the data from preceding taxable years of the predecessor attributable to the portion of the trade or business acquired, if available, must be used in determining the bank’s recovery percentage. If a bank disposes of a major portion of a trade or business or the major portion of a separate unit of a trade or business, and the bank furnished the acquiring person the information necessary for the computations required by Rev. Proc. 2007–33, then in applying the revenue procedure for any taxable year ending on or after the disposition, the data from preceding taxable years attributable to the disposed portion of the trade or business may not be used in determining the bank’s recovery percentage.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.08 is “108.” (4) Contact information . For further information regarding a change under this section, contact Timothy Sebastian at (202) 317-6945 (not a toll-free number).

.09 Change from the cash method to an accrual method for specific items .

(1) Description of change . (a) Applicability . This change applies to a taxpayer that uses an overall accrual method of accounting but has identified a specific item or items of income or expense (or both) that are being accounted for on the cash method of accounting. This change does not apply to a taxpayer

that is changing its overall method of accounting from cash to accrual. Such a taxpayer may be eligible to change to an overall accrual method using section 14.01 of this revenue procedure. (b) Inapplicability . This change does not apply to:

(i) a taxpayer that will not have all items of income and expense on an accrual method subsequent to the change under this section 14.09;

(ii) a cooperative organization described in § 501(c)(12), 521, or 1381;

(iii) an individual taxpayer, except for activities conducted as a sole proprietorship;

(iv) a taxpayer engaged in two or more trades or businesses, unless the taxpayer makes this change so that the identical accrual method is used for each such trade or business beginning with the year of change;

(v) a change in method of accounting for any payment liability described in § 1.461–4(g);

(vi) a change in the method of accounting for interest that is not taken into account under § 1.446–2; and

(vii) any change that is specifically provided in another section of this revenue procedure.

(2) Definitions . (a) “Cash method of accounting” is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). (b) “Accrual method of accounting” is the method identified by § 446(c)(2) and §§ 1.446–1(c)(1)(ii), 1.451–1(a), and 1.461–1(a)(2). (3) Additional requirements . To change a method of accounting under this section 14.09, a taxpayer must attach to its completed Form 3115 a full and complete description of each specific item for which the change in method of accounting is being made and how the accrual method of accounting applies to each item, and list the § 481(a) adjustment, if any, for each item associated with the change. The change is fully and completely described if each income and expense item is described with specificity and how the allevents test (and the economic performance requirement, if applicable) applies to each item is described under the facts and circumstances of the taxpayer’s trade

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or business. For example, a taxpayer that merely states that it is changing its accounting method for advertising expenses from the cash method to an accrual method, recites the regulations under § 1.461–1(a)(2), and enters the associated § 481(a) adjustment has failed to describe fully and completely the specific item for which the change in method of accounting is being made. In contrast, a taxpayer that states that it is changing its method of accounting for print advertising expenses from the cash method of accounting to an accrual method of accounting, describes all of the relevant facts related to the print advertising expenses, and explains how the all-events test applies to those facts and when economic performance occurs has fully and completely described the item and the change. See section 6.03 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, for additional filing requirements.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.09 is “124.” (5) Contact information . For further information regarding a change under this section, contact Charles Gorham at (202) 317-7003 (not a toll-free number). .10 Multi-year service warranty con- tracts .

(1) Description of change . (a) Applicability . This change applies to a manufacturer, wholesaler, or retailer of motor vehicles or other durable consumer goods that uses an overall accrual method of accounting, and wants to change to the service warranty income method described in section 5 of Rev. Proc. 97–38, 1997–2 C.B. 479. Under the service warranty income method, a qualifying taxpayer may, in certain specified and limited circumstances, include a portion of an advance payment related to the sale of a multi-year service warranty contract in gross income generally over the life of the service warranty obligation.

(b) Inapplicability . This change does not apply to a taxpayer not within the scope of Rev. Proc. 97–38.

(2) Manner of making change and des- ignated automatic accounting method change number .

(a) This change is made on a cut-off basis and applies only to qualified ad

vance payments for multi-year service warranty contracts on or after the beginning of the year of change. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(b) In accordance with § 1.446– 1(e)(3)(ii), the requirement of § 1.446– 1(e)(3)(i) to file a Form 3115 is waived and pursuant to section 6.02(2) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, a short Form 3115 is authorized for this change. The short Form must include the following information:

(i) the identification section of page 1 (above Part I);

(ii) the signature section at the bottom of page 1;

(iii) Part I, line 1(a); and (iv) the information required under section 6.03 of Rev. Proc. 97–38, except that the statement under section 6.03(2) (that the taxpayer agrees to all of the terms and conditions of the revenue procedure) also should refer to Rev. Proc. 2015–13.

(3) Additional requirement . A taxpayer changing to the service warranty income method of accounting under this section 14.10 must satisfy the annual reporting requirement set forth in section 6.04 of Rev. Proc. 97–38.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.10 is “125.” (5) Contact information . For further information regarding a change under this section, contact Erika Reigle at (202) 3175100 (not a toll-free number). .11 Overall cash method for specified transportation industry taxpayers .

(1) Description of change . This change applies to a “specified transportation industry taxpayer” with “average annual gross receipts” of more than $10,000,000 and not in excess of $50,000,000 that wants to change to the overall cash receipts and disbursement (cash) method.

(2) Definitions . For purposes of this section 14.11 the following definitions apply:

(a) Specified transportation industry taxpayer . A specified transportation industry taxpayer is a taxpayer that satisfies the following criteria for the year of change:

(i) The taxpayer reasonably identifies its “business” (as defined in section 14.11(2)(b) below) as being described in one of the following NAICS subsector codes (first three digits of the six-digit NAICS codes):

(A) Air Transportation, Rail Transportation, Water Transportation, Truck Transportation, Transit and Ground Passenger Transportation, or Scenic and Sightseeing Transportation, within the meaning of NAICS subsector codes 481– 485 and 487; or (B) Support Activities for Transportation within the meaning of NAICS subsector code 488.

(ii) The taxpayer is not prohibited from using the overall cash method under § 448.

(b) Business . A taxpayer may use any reasonable method of applying the relevant facts and circumstances to determine its business. A business may consist of several activities, which may or may not be related. For example, a taxpayer engaged in transportation activities may provide various services such as transporting air cargo and then subsequently trucking the cargo throughout a metropolitan area to warehouses and wholesale/retail stores. However, each activity within a taxpayer’s business must individually satisfy the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this revenue procedure. For example, a sightseeing bus operator that sells box lunches in connection with its tours is not a “specified transportation industry taxpayer” because one of the two activities of its business (food sales) does not satisfy the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this revenue procedure. While the sightseeing transportation activity satisfies the description of the NAICS subsector code in section 14.11(2)(a)(i)(A) of this revenue procedure, the food sales activity does not satisfy the description of any NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this revenue procedure, and thus, the taxpayer’s business fails to meet the criteria of section 14.11(2)(a)(i). Similarly, a train operator who operates a dining car where meals are served is not a “specified transportation industry taxpayer” because one of the two activities of its business (food service) does not satisfy

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the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this revenue procedure. While the rail transportation activity satisfies the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) of this revenue procedure, the food service activity does not satisfy the description of any NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this revenue procedure, and thus, the taxpayer’s business fails to meet the criteria of section 14.11(2)(a)(i).

(c) Average annual gross receipts . A taxpayer has average annual gross receipts of more than $10,000,000 and not in excess of $50,000,000 if, for each prior taxable year ending on or after December 31, 2006, the taxpayer’s average annual gross receipts for the three prior taxable-year period ending with the applicable prior taxable year are more than $10,000,000 and do not exceed $50,000,000. If a taxpayer has not been in existence for three prior taxable years, the taxpayer must determine its average annual gross receipts for the number of years (including short taxable years) that the taxpayer has been in existence. See § 448(c)(3)(A).

(d) Gross receipts . Gross receipts is defined consistent with § 1.448– 1T(f)(2)(iv). Thus, gross receipts for a taxable year equal all receipts that must be recognized under the method of accounting actually used by the taxpayer for that taxable year for federal income tax purposes. See also § 448(c)(3)(C).

(e) Aggregation of gross receipts . For purposes of computing gross receipts under section 14.11(2)(d) of this revenue procedure, all taxpayers treated as a single employer under § 52(a) or (b) or § 414(m) or (o) (or that would be treated as a single employer under these sections if the taxpayers had employees) will be treated as a single taxpayer. However, when transactions occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross receipts arising from these transactions will not be treated as gross receipts for purposes of the average annual gross receipts limitation. See § 448(c)(2) and § 1.448–1T(f)(2)(ii).

(f) Treatment of short taxable year . In the case of a short taxable year, a taxpayer’s gross receipts must be annualized by multiplying the gross receipts for the short taxable year by 12 and then dividing the

result by the number of months in the short taxable year. See § 448(c)(3)(B) and § 1.448–1T(f)(2)(iii).

(g) Treatment of predecessors . Any reference to a taxpayer in this section 14.11 includes a reference to any predecessor of that taxpayer. See § 448(c)(3)(D).

(h) Cash method . The “cash method” is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). (3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.11 is “126.” (4) Example . Taxpayer X is an LLC and taxed for federal income tax purposes as a partnership. Taxpayer X does not have any C corporations as partners and Taxpayer X is not a tax shelter within the meaning of § 448(d)(3). Taxpayer X ’s business consists of short-haul trucking among various cities within State Y, which satisfies the description of the NAICS subsector code 484. Taxpayer X determines that its 3-year average annual gross receipts for each prior taxable year ending on or after December 31, 2006, have been more than $10,000,000 and not in excess of $50,000,000. Taxpayer X qualifies to change to the overall cash method using this section 14.11.

(5) Contact information . For further information regarding a change under this section, contact Megan M. Kirmil at (202) 317-7007 (not a toll-free number). .12 Change to overall cash/hybrid method for certain banks .

(1) Description of change . (a) Applicability . This change applies to a bank described in section 14.12(2)(a) of this revenue procedure that wants to change to an overall cash/hybrid method described in section 14.12(2)(b) of this revenue procedure.

(b) Inapplicability . A bank’s change to an overall cash/hybrid method under this section 14.12 does not include any change in the accounting treatment of an item for which the bank uses a special method (as described in section 14.12(2)(b) of this revenue procedure) before the change, or is required to use a special method, or will use a special method after the change. A bank may not change the accounting treatment of such an item under this section 14.12. Any change in the accounting treatment of such an item must be made under an applicable section of this revenue procedure, under the non-automatic change procedures of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, or under another guid

ance published in the Internal Revenue Bulletin, as appropriate.

(2) Definitions . The following definitions apply for purposes of this section 14.12. (a) Bank . A bank is described in this section 14.12(2)(a) if the bank:

(i) is a bank as defined in § 581; (ii) is an S corporation as defined in § 1361(a)(1), or a qualified subchapter S subsidiary as defined in § 1361(b)(3)(B); and

(iii) has average annual gross receipts (computed as described in section 14.12(5) of this revenue procedure) not in excess of $50,000,000.

(b) Overall cash/hybrid method . An overall cash/hybrid method is the use of a combination of accounting methods under which some items of income or expense are reported on the cash receipts and disbursements method (cash method) and other items of income or expense are reported on methods permitted or required for the accounting treatment of special items (special methods).

(i) Cash method . The cash method is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). (ii) Special methods . A few of the special methods typically used by banks include those provided for the accounting treatment of the following items: securities held by a dealer in securities as defined in § 475(c)(1) (the mark-to-market method of § 475); securities held by a dealer in securities as defined in § 1.471–5 (inventories maintained under § 471 and § 1.446–1(c)(2)(i)); hedging transactions (§ 1.446–4); contracts to which § 1256 applies (§ 1256); original issue discount on debt instruments (§§ 163(e) and 1271– 1275); interest income (including acquisition discount and original issue discount) on short-term obligations (§§ 1281– 1283); and stripped debt instruments (§ 1286). For example, a bank that regularly purchases or originates mortgages in the ordinary course of its business and engages in more than negligible sales of those mortgages generally is a dealer in securities under § 475(c)(1) and § 1.475(c)–1(c) and thus must use the mark-to-market method of § 475 for mortgages and any other securities (as defined in § 475(c)(2)) held by the bank.

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(3) Additional condition of change . To change to an overall cash/hybrid method under this section 14.12, a bank must comply with the following additional condition. In addition to complying with the terms and conditions set forth in section 7 of Rev. Proc. 2015–13, the bank must keep its books and records for the year of change and for subsequent taxable years on an overall cash/hybrid method allowed by this section 14.12. This condition is considered satisfied if the bank reconciles the results obtained under the method used in keeping its books and records and those obtained under the method used for federal income tax purposes pursuant to this section 14.12 and the bank maintains sufficient records to support such reconciliation. See also § 1.446–1(a)(4).

(4) Additional filing requirement . To change to an overall cash/hybrid method under this section 14.12, a bank must include with its completed Form 3115 a description of each specific item of the bank’s income or expense that is affected by the change under this section 14.12 and, for each such item, identify the following: the method of accounting under which the bank reports that item for federal income tax purposes immediately before the change; and the amount of the § 481(a) adjustment associated with changing that item to the cash method under this section 14.12.

(5) Computation of average annual gross receipts . For purposes of section 14.12(2)(a)(iii) of this revenue procedure, a bank’s average annual gross receipts are computed as described in this section 14.12(5). (a) Average annual gross receipts . A bank has average annual gross receipts not in excess of $50,000,000 if, for each prior taxable year ending on or after December 31, 2006, the bank’s average annual gross receipts for the three prior taxable-year period ending with the applicable prior taxable year do not exceed $50,000,000. If a bank has not been in existence for three prior taxable years, the bank must determine its average annual gross receipts for the number of years (including short taxable years) that the bank has been in existence. See § 448(c)(3)(A).

(b) Gross receipts . Gross receipts is defined consistent with § 1.448– 1T(f)(2)(iv). Thus, gross receipts for a

taxable year equal all receipts that must be recognized under the method of accounting actually used by the bank for that taxable year for federal income tax purposes. See also § 448(c)(3)(C).

(c) Aggregation of gross receipts . For purposes of computing gross receipts under section 14.12(5)(b) of this revenue procedure, all taxpayers treated as a single employer under § 52(a) or (b) or § 414(m) or (o) (or that would be treated as a single employer under these sections if the taxpayers had employees) will be treated as a single taxpayer (that is, a single bank). However, when transactions occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross receipts arising from these transactions will not be treated as gross receipts for purposes of the average annual gross receipts limitation. See § 448(c)(2) and § 1.448–1T(f)(2)(ii).

(d) Treatment of short taxable year . In the case of a short taxable year, a bank’s gross receipts must be annualized by multiplying the gross receipts for the short taxable year by 12 and then dividing the result by the number of months in the short taxable year. See § 448(c)(3)(B) and § 1.448–1T(f)(2)(iii).

(e) Treatment of predecessors . Any reference to a bank or taxpayer in section 14.12(5) of this revenue procedure includes a reference to any predecessor of that bank or taxpayer. See § 448(c)(3)(D).

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.12 is “127.” (7) Contact information . For further information regarding a change under this section, contact K. Scott Brown at (202) 317-6945 (not a toll-free number). .13 Change to overall cash method for farmers .

(1) Description of change . (a) Applicability . This change applies to a taxpayer engaged in the trade or business of farming that wants to change to the overall cash receipts and disbursement (cash) method. If a taxpayer is engaged in more than one trade or business, this change applies only to the taxpayer’s trade or business of farming.

(b) Inapplicability . This change does not apply to a taxpayer that is required to

use an accrual method pursuant to § 447 or prohibited from using the cash method by § 448.

(2) Definitions . (a) Cash method of accounting is the method defined by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). See also, §§ 1.61–4 and 1.162–12 for specific rules relating to farmers.

(b) The trade or business of farming is a farming business as defined by § 263A(e)(4) and the regulations thereunder.

(3) Manner of making change . Generally, a taxpayer changing its method of accounting under this section 14.13, must compute a § 481(a) adjustment. However, if the taxpayer is changing from the crop method, that portion of the change is made using a cut-off basis under which expenses reported on the crop method and not deducted prior to the year of change are deducted in the year the related crop is sold.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.13 is “128.” (5) Contact information . For further information regarding a change under this section, contact Maxine Woo-Garcia at (202) 317-7011 or Renay France at (202) 317-7003 (not a toll-free number). .14 Nonshareholder contributions to capital under § 118 .

(1) Description of change . (a) Water and sewerage disposal utili- ties .

(i) This change applies to a regulated public utility described in § 118(c) that wants to change its method of accounting for payments received from customers as customer connection fees, which are not contributions to the capital of the regulated public utility within the meaning of § 118(c), from excluding the payments from gross income as nontaxable contributions to capital under § 118 to including the payments in gross income under § 61. See Rev. Rul. 2008–30, 2008–1 C.B. 1156. (ii) This change applies to a regulated public utility described in § 118(c) that wants to change its method of accounting for payments or property received that are

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contributions in aid of construction under § 118(c) and § 1.118–2 and that meet the requirements of §§ 118(c)(1)(B) and 118(c)(1)(C) from including the payments or the fair market value of the property in gross income under § 61 to excluding the payments or the fair market value of the property from income as nontaxable contributions to capital under § 118(a).

(b) Other payments or property re- ceived . This change applies to a taxpayer that wants to change its method of accounting for payments or property received (other than the payments received by a public utility described in § 118(c) that are addressed in section 14.14(1)(a)(i) of this revenue procedure) that do not constitute contributions to the capital of the taxpayer within the meaning of § 118 and the regulations thereunder, from excluding the payments or the fair market value of the property from gross income as nontaxable contributions to capital under § 118 to including the payments or the fair market value of the property in gross income under § 61.

(2) Additional requirement . A taxpayer that is making a change described in section 14.14(1)(a)(i) or (1)(b) must complete Schedule E of Form 3115 for the depreciable property to which the change relates (as well as all other relevant portions of the Form 3115).

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.14 is “129.” (4) Contact information . For further information regarding a change under this section, contact David H. McDonnell at (202) 317-4137 (not a toll-free number).

.15 Debt issuance costs . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for capitalized debt issuance costs to comply with § 1.446–5, which provides rules for allocating the costs over the term of the debt. This change also applies to a taxpayer that wants to change its method of accounting for capitalized debt issuance costs from one permissible method to another permissible method under the last sentence in § 1.446–5(b)(2) if the total original issue discount determined for purposes of § 1.446–5 is de minimis .

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 14.15 is “148.” (3) Contact information . For further information regarding a change under this section, contact Charles W. Culmer at (202) 317-6945 (not a toll-free number).