SECTION 19. SPECIAL RULES FOR

LONG-TERM CONTRACTS (§ 460).

01 Small business taxpayer exceptions from requirement to account for certain long-term contracts under § 460 or to capitalize costs under § 263A for certain home construction contracts

(1) Description of change . This change applies to a taxpayer that (a) wants to change its method of accounting for exempt long-term construction contracts described in § 460(e)(1)(B) from the percentage-of-completion method of accounting described in § 1. 460-4(b) to an exempt contract method of accounting described in § 1. 460-4(c); or (b) chooses to stop capitalizing costs under § 263A for home construction contracts described in § 460(e)(1)(A) and meets the requirements of § 460(e)(1)(B)(i) and (ii).

(2) Inapplicability . A taxpayer can use a method of accounting for its exempt long-term contracts that is different from the method used for contracts that are not exempt. Thus, a taxpayer must use the percentage-of-completion method of accounting for nonresidential long-term construction contracts that do not meet the requirements of § 460(e)(1)(B), proposed § 1. 460-3(b)(1)(ii), or § 1. 460-3(b)(1)(ii), as applicable, in the first taxable year it enters into such a contract, but must continue to use its exempt contract method of accounting for its existing exempt longterm construction contracts. Similarly, in the first taxable year that a taxpayer enters into a nonresidential long-term construction contract that meets the requirements of § 460(e)(1)(B), proposed § 1. 460-3(b)

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(1)(ii), or § 1. 460-3(b)(1)(ii), as applicable, the taxpayer can use a permissible exempt contract method of accounting for such a contract. Rev. Rul. 92-28, 1992-1 C. B. 153. Accordingly, only a taxpayer who previously adopted the percentage-of-completion method of accounting for exempt long-term construction contracts and wants to change to another permissible exempt contract method of accounting is required to request consent to change under this section 19. 01. Similarly, a taxpayer that enters into a home construction contract described in § 460(e) (1)(A) and that meets the requirements of § 460(e)(1)(B)(i) and (ii) requires consent to change its method of accounting to not capitalize costs under § 263A only if the taxpayer has previously applied § 263A to home construction contracts exempt from the capitalization requirement under § 460(e)(1).

(3) Manner of making change . This change is made on a cut-off basis and applies only to long-term construction contracts entered into on or after the first day of the year of change. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(4) Reduced filing requirement . A taxpayer is required to complete only the following information on Form 3115 (Rev. December 2022) to make this change:

(a) The identification section of page 1 (above Part I);

(b) The signature section at the bottom of page 1;

(c) Part I; (d) Part II, all lines except line 16; (e) Part IV, line 25; and (f) Schedule D, Part I. (5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under this section 19. 01 is “236. ” (6) Contact information . For further information regarding changes under this section, contact Innessa Glazman at (202) 317-7006 (not a toll-free number).. 02 Change to rely on the interim guid- ance provided in section 8 of Notice 2023- 63, 2023-39 I.R.B. 919 (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting under § 460 to rely on the interim guidance provided

in section 8 of Notice 2023-63, 2023-39 I. R. B. 919, so that the costs allocable to a long-term contract accounted for using the PCM include amortization deductions for specified research or experimental (SRE) expenditures, as defined in §174(b) and section 4. 02(2) of Notice 2023-63, as applicable, under §174(a)(2)(B), rather than the capitalized amount of such expenditures, and the amortization deductions for such expenditures are treated as incurred for purposes of determining the percentage of contract completion in the taxable year the amortization is deducted. For purposes of determining the percentage of contract completion, estimated total allocable contract costs include either (1) all amortization of SRE expenditures that directly benefit or are incurred by reason of the performance of the long-term contract, or (2) only that portion of such amortization expected to be incurred and deducted during the term of the contract. A taxpayer using the first alternative is required to report any portion of the contract price not previously reported by the taxable year following the taxable year in which the contract is completed, notwithstanding that some portion of the SRE expenditures remain unamortized. See § 460(b)(1).

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

(a) A change in method of accounting under § 460 with respect to expenditures capitalized under § 59(e)(2)(B), or under § 174(b) prior to its amendment by § 13206(a) of the TCJA.

(b) A change in method of accounting for independent research and development expenditures, as defined § 460(c)(5), which are not allocable contract costs.

(c) Any contract not accounted for under the PCM, as described in § 460(b) (1) and § 1. 460-4(b)(2), as of the beginning of the year of change.

(3) Manner of making change . (a) Cut-off basis . A change under section 19. 02(1) of this revenue procedure for the taxpayer’s first taxable year beginning after December 31, 2021, applies to the § 460 treatment of SRE expenditures paid or incurred in taxable years beginning after December 31, 2021. Accordingly, such change is made on a cut-off basis, and applies to all long-term contracts for which an SRE expenditure is an allocable

contract cost, including long-term contracts entered into before the beginning of the year of change. A taxpayer making this change does not recompute its taxable income under § 1. 460-4(b) for any taxable year beginning on or before December 31, 2021. (b) Modified § 481(a) adjustment or cut-off basis

(i) In general . Except as provided in section 19. 02(3)(b)(ii) of this revenue procedure, a change under section 19. 02(1) of this revenue procedure for a year of change later than the first taxable year beginning after December 31, 2021, is made with a modified § 481(a) adjustment that takes into account the § 460 treatment of SRE expenditures paid or incurred in taxable years beginning after December 31, 2021. Such change applies to all long-term contracts for which an SRE expenditure is an allocable contract cost, including longterm contracts entered into before the beginning of the year of change.

(ii) Exception for negative modified § 481(a) adjustment . If a change described in section 19. 02(3)(b)(i) of this revenue procedure results in a modified § 481(a) adjustment that is negative, the taxpayer may instead choose to implement the change on a cut-off basis.

(4) Certain eligibility rules inapplica- ble . The eligibility rules in section 5. 01(1) (d) and (f) of Rev. Proc. 2015-13, 2015-5 I. R. B. 419, do not apply to a change described in section 19. 02(1) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021.

(5) Limited audit protection . A taxpayer does not receive audit protection under section 8. 01 of Rev. Proc. 2015-13 for a change under section 19. 02(1) of this revenue procedure with respect to the § 460 treatment of expenditures paid or incurred in taxable years beginning on or before December 31, 2021.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19. 02 of this revenue procedure is “271. ”

(7) Contact information . For further information regarding a change under section 19. 02 of this revenue procedure, contact John Aramburu at (202) 317-7006 (not a toll-free number).

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