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Jim Gadwood Quoted on New Consolidated List of Automatic Method Changes in Tax Notes

"IRS Extends Window on Automatic Revenue Recognition Changes"

Tax Notes

Jim Gadwood discussed three significant changes the Internal Revenue Service (IRS) made in Rev. Proc. 2023-24, the newly released consolidated list of automatic accounting method changes. First, Gadwood welcomed the IRS's decision to waive the prior five-year item change limitation for an additional year for taxpayers seeking to make certain accounting method changes relating to revenue recognition under section 451(b). He pointed to the trend of the IRS granting short-term scope waivers in initial procedural guidance and wondered if Rev. Proc. 2023-24 could indicate the start of a pattern of short initial grants that the IRS subsequently extends.

Second, Gadwood noted the changes the IRS made to the automatic method change for adopting the Natural Gas Safe Harbor Method from Rev. Proc. 2023-15, released in April. The IRS added a requirement that taxpayers attach additional statements to their Form 3115 when making the change and provided that taxpayers must exclude amounts subject to a prior book capitalization election under Treas. Reg. section 1.263(a)-3(n) when calculating a section 481(a) adjustment. Gadwood said the new statement requirement is consistent with other normalization provisions for public utility tax accounting method changes and it was surprising that the requirement wasn't in Rev. Proc. 2023-15 in the first place. The new provision regarding prior book capitalization elections prevents taxpayers from using the automatic method change to avoid the requirement of IRS advance consent for revoking those elections, he said.

Third, Gadwood observed that the IRS also clarified that the automatic accounting method change for transitioning to a permissible section 174 method for research expenditures includes moving from capitalizing these amounts to inventory for recovery as cost of goods sold to capitalizing these amounts and amortizing them. He interpreted this clarification as the IRS sending a signal that taxpayers won't be able to get around the new amortization requirement by capitalizing research expenditures to inventory and suggested this could be a preview of what’s to come in expected proposed regulations under section 174.