SECTION 2. BACKGROUND

.01 The Treasury Department and the Internal Revenue Service (IRS) recently issued final regulations under §§ 1.162–3, 1.162–4, 1.168(i)–1, 1.168(i)–7, 1.168(i)–8, 1.263(a)–1, 1.263(a)–2, and 1.263(a)–3 (T.D. 9636, 2013–43 I.R.B. 331, 78 Fed. Reg. 57686; T.D. 9689, 2014–36 I.R.B. 456, 79 Fed. Reg. 48661) (the final tangible property regulations), along with corresponding revenue procedures on related changes in method of accounting. See Rev. Proc. 2014–16, 2014–9 I.R.B. 606; Rev. Proc. 2014–54, 2014–41 I.R.B. 675, (amplified, clarified, or modified by sections 6.37, 6.38, 6.39, and 10.11 of Rev. Proc. 2015–14). The final tangible property regulations generally apply to taxable years beginning on or after January 1, 2014, but also permit a taxpayer to choose

to apply them to taxable years beginning on or after January 1, 2012.

.02 Since the final tangible property regulations and the accompanying method change procedures were published, the Treasury Department and the IRS have received numerous requests to further simplify the process for small businesses to start applying the final tangible property regulations. In particular, the Treasury Department and the IRS have been asked to permit small businesses to make changes in methods of accounting using a cut-off basis and without filing a Form 3115.

.03 Except as otherwise expressly provided in the Code and the regulations thereunder, § 446(e) and § 1.446–1(e)(2) require a taxpayer to secure the consent of the Commissioner before changing a method of accounting for federal tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary for a taxpayer to obtain consent to change a method of accounting. A taxpayer that changes a method of accounting must apply the provisions of § 481, which accounts for how the taxpayer treated the items being changed in prior years to avoid duplication of deductions or omission of income. To avoid duplication or omission, taxpayers must follow the rules of § 446(e) and § 481 when applying the final tangible property regulations.

.04 The final tangible property regulations and the method change procedures were issued following a lengthy development process that considered and addressed the prior concerns communicated by small businesses and their representatives. In particular, to simplify the transition to the final tangible property regulations, the Treasury Department and the IRS provided taxpayers with automatic consent to change their methods of accounting to utilize the final tangible property regulations and reduced filing requirements for small taxpayers. The final tangible property regulations also contain several simplifying provisions that are elective and prospective in application (for example, the election to apply the de minimis safe harbor in § 1.263(a)–1(f); the election to utilize the safe harbor for small taxpayers in § 1.263(a)–3(h); and the election to capitalize repair and main

tenance costs in § 1.263(a)–3(n)). These annual elections do not require a taxpayer to change its method of accounting.

.05 To further ease the administrative burden faced by small business taxpayers in prospectively applying the final tangible property regulations beginning in 2014, this revenue procedure modifies certain procedures provided in Rev. Proc. 2015–14 to permit small business taxpayers to make changes in methods of accounting with a § 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014. This modification means that, effectively, small business taxpayers making these changes in method of accounting for the first taxable year that begins on or after January 1, 2014, may elect to make the change on a cut-off basis.

.06 While some small business taxpayers may choose to file a Form 3115 in order to retain a clear record of a change in method of accounting or to make permissible concurrent automatic changes on the same form, other small business taxpayers may prefer the administrative convenience of being able to comply with the final tangible property regulations in their first taxable year that begins on or after January 1, 2014, solely through the filing of a federal tax return. Accordingly, for the first taxable year that begins on or after January 1, 2014, small business taxpayers that choose to prospectively apply the tangible property regulations to amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014, have the option of making certain tangible property changes in method of accounting on the federal tax return without including a separate Form 3115 or separate statement. .07 Under section 6.02 of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, ordinarily a taxpayer must submit a separate Form 3115 for each automatic change. In some cases, however, Rev. Proc. 2015–14 describes particular changes in method of accounting that a taxpayer is required or permitted to request on a single Form 3115 (concurrent changes). If, as provided by this revenue procedure, a taxpayer chooses to make certain tangible property changes in method of accounting on a federal tax return without filing a Form

March 2, 2015 694 Bulletin No. 2015–9

3115, concurrent automatic changes, other than those specifically addressed in section 5 of this revenue procedure, are not permitted to be made without completing a Form 3115.

.08 A small business taxpayer choosing the option of calculating a § 481(a) adjustment that takes into account only amounts paid or incurred, and dispositions, in taxable years beginning on or after January 1, 2014, does not receive audit protection under section 8.01 of Rev. Proc. 2015–13 (or any successor) for taxable years beginning prior to January 1, 2014.

.09 Section 5.02 of this revenue procedure provides small business taxpayers with the option of choosing to make a change to a tangible property method of accounting specified in Rev. Proc. 2015– 14, section 10.11(3)(a), with a § 481(a) adjustment that does not take into account amounts paid or incurred in taxable years beginning before January 1, 2014. If a small business taxpayer chooses to make a § 481(a) adjustment that does not take into account amounts paid or incurred in taxable years beginning before January 1, 2014, then the taxpayer also must choose to make a § 481(a) adjustment that does not take into account dispositions in taxable years beginning before January 1, 2014, for certain changes made under sections 6.37, 6.38, and 6.39 of Rev. Proc. 2015–14. Because taxable years beginning before January 1, 2014, are not taken into account by a small business taxpayer choosing this option, audit protection as provided in section 8 of Rev. Proc. 2015–13 (or any successor) applies only to amounts subject to a change made under section 10.11(3)(a) of Rev. Proc. 2015–14 that are paid or incurred (and dispositions subject to a change made under sections 6.37, 6.38, and 6.39 of Rev. Proc. 2015–14) in taxable years beginning on or after January 1, 2014.

.10 Sections 5.03 through 5.05 of this revenue procedure provide a similar option for dispositions, permitting small business taxpayers to choose to make certain tangible property disposition changes with a § 481(a) adjustment that does not take into account dispositions in taxable years beginning before January 1, 2014. Specifically, sections 5.03 through 5.05 of this revenue procedure modify sections 6.37, 6.38, and 6.39 of Rev. Proc.

2015–14 and provide that if a small business taxpayer chooses to make a § 481(a) adjustment that does not take into account dispositions in taxable years beginning before January 1, 2014, then the taxpayer must consistently apply this treatment to all dispositions (other than dispositions of assets in general asset accounts) covered by sections 6.37–6.39 of Rev. Proc. 2015–14. In addition, the taxpayer also must choose to make a § 481(a) adjustment that does not take into account amounts paid or incurred in taxable years beginning before January 1, 2014, for any change made under section 10.11(3)(a) of Rev. Proc. 2015–14. Further, because taxable years beginning before January 1, 2014, are not taken into account by a taxpayer choosing this option, audit protection as provided in section 8 of Rev. Proc. 2015–13 (or any successor) applies only to dispositions subject to a change made under sections 6.37, 6.38, and 6.39 of Rev. Proc. 2015–14 (and amounts subject to a change made under section 10.11(3)(a) of Rev. Proc. 2015–14 that are paid or incurred) in taxable years beginning on or after January 1, 2014.

.11 For a small business taxpayer that chooses to make a tangible property disposition change that only takes into account dispositions in 2014 and succeeding taxable years, it is unnecessary and inappropriate to permit a late partial disposition election, which would permit partial dispositions for taxable years beginning prior to January 1, 2014. Accordingly, section 5.06 of this revenue procedure provides that the late partial disposition election in section 6.33 of Rev. Proc. 2015–14 is inapplicable to a small business taxpayer that, under the provisions of this revenue procedure, changed to a method of accounting and calculated a § 481(a) adjustment that took into account only dispositions in taxable years beginning on or after January 1, 2014.

.12 Section 8 of this revenue procedure provides a transition rule for a taxpayer within the scope of this revenue procedure that has previously filed its federal tax return for its first taxable year beginning on or after January 1, 2014, permitting withdrawal of the filed Form 3115 through the filing of an amended return on or before the due date of the taxpayer’s timely filed (including any extension)

original federal income tax return for the requested year of change.