A copy of Rev. Proc. 2004-11, (reproduced in full below), may be found here.
* * *
If you have any questions regarding the above article, please [contact us]. Our in-house CPA’s and cost segregation specialists stand ready to address any needs you or your client may have.
Part III
Administrative, Procedural,
and Miscellaneous
26 CFR 601.204: Changes in
accounting periods and in methods of accounting.
(Also Part I, §§ 446, 1016;
1.446-1T, 1.1016-3T.)
Rev. Proc. 2004-11
SECTION 1. PURPOSE
This
revenue procedure provides an automatic consent procedure allowing a taxpayer
to make a change in method of accounting under § 446(e) of the Internal Revenue
Code for depreciable or amortizable property after its disposition. This
revenue procedure also waives the application of the two-year rule set forth in
Rev. Rul. 90-38, 1990-1 C.B. 57, for certain changes in depreciation or
amortization. Finally, this revenue procedure modifies Rev. Proc. 2002-9,
2002-1 C.B. 327 (as modified by Rev. Proc. 2002-54, 2002-2 C.B. 432, Rev. Proc.
2002-19, 2002-1 C.B. 696, Rev. Proc. 2002-33, 2002-1 C.B. 963, and as modified
and clarified by Announcement 2002-17, 2002-1 C.B. 561), and other revenue
procedures to conform with § 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax
Regulations.
SECTION 2. BACKGROUND
.01
Section 446(e) and § 1.446-1T(e) provide that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner of Internal Revenue before
changing a method of accounting for federal income tax purposes. Section 1.446-1T(e)(3)(ii) authorizes the Commissioner to prescribe
administrative procedures setting forth the limitations, terms, and conditions
deemed necessary to permit a taxpayer to obtain consent to change a method of
accounting.
.02
Concurrently with the issuance of this revenue procedure, §§ 1.446-1T(e)(2)(ii)(d) and 1.1016-3T(h) have been promulgated.
Section 1.446-1T(e)(2)(ii)(d) provides the changes in
depreciation or amortization (hereinafter, both are referred to as
“depreciation”) that are (and are not) changes in method of accounting under §
446(e). Section 1.1016-3T(h) provides that the
“allowed or allowable” rule under § 1016(a)(2) does not permanently affect a
taxpayer’s lifetime income for purposes of determining whether a change in
depreciation or amortization is a change in method of accounting under §
446(e).
.03 If a taxpayer uses an impermissible method of
determining depreciation for a depreciable or amortizable property, the
taxpayer adopts that method of accounting for the property when the taxpayer
treats the property in the same way in determining gross income or deductions
in two or more consecutively filed federal tax returns. See Rev. Rul. 90-38. The
Internal Revenue Service and Treasury Department recognize that this two-year
rule increases administrative and compliance costs associated with changes in
depreciation because many taxpayers changing from an impermissible to
permissible method of accounting for depreciation used the impermissible method
for depreciable or amortizable properties placed in service in two or more
taxable years before the year of change as well as for depreciable and
amortizable properties placed in service in the taxable year immediately preceding
the year of change. Accordingly, in the interest of sound tax administration,
the Service and Treasury Department have decided to waive the two-year rule in
Rev. Rul. 90-38 for a change in depreciation to which § 1.446-1T(e)(2)(ii)(d)
applies.
.04
If a depreciable or amortizable property is transferred in a transaction in
which the transferee is treated as the transferor for purposes of computing the
depreciation allowance for the property with respect to so much of the basis in
the hands of the transferee as does not exceed the adjusted depreciable basis
in the hands of the transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee may file a Form 3115,
Application for Change in Accounting Method, to change from an impermissible
method of accounting adopted by the transferor for that portion of the basis of
the property to a permissible method of accounting for depreciation for the
same portion of the basis of the property, provided the impermissible method of
accounting for that portion of the basis of the property has not been changed
by the transferor (through filing, for example, a Form 3115 or an amended
return) or by the Internal Revenue Service upon examination of the transferor’s
tax returns. In this case, the § 481 adjustment will include any necessary
adjustments since the property’s placed-in-service date by the transferor.
SECTION 3. METHOD CHANGE PROCEDURE FOR
DISPOSED DEPRECIABLE OR AMORTIZABLE PROPERTY
.01
Scope.
(1)
Applicability. Except as provided in section 3.01(2) of this revenue procedure,
section 3 of this revenue procedure applies to a taxpayer that is changing from
an impermissible method of accounting for depreciation to a permissible method
of accounting for depreciation for any item of depreciable or amortizable
property subject to § 1.446-1T(e)(2)(ii)(d):
(a)
that has been disposed of by the taxpayer during the
year of change (as defined in section 3.02(2)(b) of this revenue procedure);
and
(b)
for which the taxpayer did not take into account any
depreciation allowance, or did take into account some depreciation but less
than the depreciation allowable (hereinafter, both are referred to as “claimed
less than the depreciation allowable”), in the year of change (as defined in
section 3.02(2)(b) of this revenue procedure) or any prior taxable year.
(2)
Inapplicability. Section 3 of this revenue procedure does not apply to:
(a)
any property to which § 1016(a)(3) (regarding property
held by a tax-exempt organization) applies;
(b)
any property for which a taxpayer is revoking a timely valid depreciation
election, or making a late depreciation election, under the Code or regulations
thereunder, or under other guidance published in the Internal Revenue Bulletin
(including under § 13261(g)(2) or (3) of the Revenue Reconciliation Act of
1993, 1993-3 C.B. 1, 128 (relating to amortizable § 197 intangibles));
(c)
any property for which the taxpayer deducted the cost
or other basis of the property as an expense; or
(d)
any property disposed of by the taxpayer in a
transaction to which a nonrecognition section of the
Code applies (for example, § 1031, transactions subject to § 168(i)(7)(B)(i)). However, this
section 3.01(2)(d) does not apply to property disposed
of by the taxpayer in a § 1031 or § 1033 transaction if the taxpayer elects to
treat the entire basis (that is, both the carryover and excess basis) of the
acquired MACRS property as property placed in service by the taxpayer at the
time of replacement and treat the adjusted depreciable basis of the exchanged
or involuntarily converted MACRS property as being disposed of by the taxpayer
at the time of disposition.
.02
Change in method of accounting.
(1)
In general. A taxpayer within the scope of section 3 of this revenue procedure
may change from an impermissible method of accounting for depreciation to a
permissible method of accounting for depreciation for any item of depreciable
or amortizable property within the scope of section 3 of this revenue
procedure, provided:
(a)
the taxpayer files the original Form 3115 in accordance with section 3.02(2)(c)
of this revenue procedure, prior to the expiration of the period of for
assessment under § 6501(a) for the taxable year in which the item of
depreciable or amortizable property was disposed of by the taxpayer; and
(b)
the taxpayer files an amended federal tax return for the year of change (as
defined in section 3.02(2)(b) of this revenue
procedure) that includes the adjustments to taxable income and any collateral
adjustments to taxable income or tax liability (for example, adjustments to the
amount or character of the gain or loss of the disposed depreciable or
amortizable property) resulting from the change in method of accounting for
depreciation made by the taxpayer under this section 3.
(2)
Application Procedures. A taxpayer making a change in method of accounting
under section 3 of this revenue procedure must follow the automatic change in
method of accounting provisions in Rev. Proc. 2002-9 (or its successor), with
the
following modifications:
(a)
The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply. If the
taxpayer is under examination, before an appeals office, or before a federal
court at the time that a copy of the Form 3115 is filed with the national
office, the taxpayer must provide a copy of the Form 3115 to the examining
agent, appeals officer, or counsel for the government, as appropriate, at the
time the copy of the Form 3115 is filed with the national office. The Form 3115
must contain the name(s) and telephone number(s) of the examining agent,
appeals officer, or counsel for the government, as appropriate.
(b)
The year of change is the taxable year in which the item of depreciable or
amortizable property was disposed of by the taxpayer.
(c)
Section 6.02(3)(a) of Rev. Proc. 2002-9 is modified to
require the original of the Form 3115 to be attached to the taxpayer’s timely
filed amended federal tax return for the year of change and a copy (with
signature) of the Form 3115 to be filed with the national office no later than
when the original Form 3115 is filed with the amended federal tax return for
the year of change.
(d)
For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the taxpayer should
include on line 1a of the Form 3115 (revised December 2003) the designated
automatic accounting method change number for the change in method of
accounting for depreciation made under this section 3. This number for this
method change is “9.”
SECTION 4. WAIVER OF TWO-YEAR RULE IN
REV. RUL. 90-38
.01 In general. Notwithstanding Rev. Rul. 90-38, a taxpayer
may file a Form 3115 under Rev. Proc. 97-27, 1997-1 C.B. 680 (or its
successor), or Rev. Proc. 2002-9, as applicable, to change from an
impermissible method of accounting for depreciation to a permissible method of
accounting for depreciation under § 1.446-1T(e)(2)(ii)(d) for any depreciable
or amortizable property subject to § 1.446-1T(e)(2)(ii)(d) and placed in
service by the taxpayer in the taxable year immediately preceding the year of
change (as defined in section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of
Rev. Proc. 2002-9, as applicable) (hereinafter, this property is referred to as
“1-year depreciable property”), provided the additional term and condition in
section 4.02 of this revenue procedure is satisfied. Alternatively, the
taxpayer may make the change from the impermissible depreciation method to the
permissible depreciation method for the 1-year depreciable property by filing
an amended federal tax return for the placed-in-service year prior to the date the
taxpayer files its federal tax return for the taxable year succeeding the
placed-in-service year.
.02 Additional term and condition for filing a Form
3115. In
addition to the terms and conditions provided in Rev. Proc. 97-27 or Rev. Proc.
2002-9, as applicable, the § 481 adjustment reported on a Form 3115 that is
filed by a taxpayer in accordance with section 4.01 of this revenue procedure
to make a change in method of accounting for depreciation under §
1.446-1T(e)(2)(ii)(d) for any 1-year depreciable property, must include the
amount of any adjustment attributable to all property (including the 1-year
depreciable property) subject to the Form 3115.
SECTION 5. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2002-9 is modified and amplified
to include the accounting method change provided under section 3 of this
revenue procedure in section 2.05 of the APPENDIX. See section 4 of the
APPENDIX of this revenue procedure for the text of section 2.05 of the APPENDIX
of Rev. Proc. 2002-9.
.02
The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to
read as follows: “SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1), 56(g)(4)(A), 167, 168, 197, 1400I, OR 1400L, OR FORMER
§ 168)”.
.03
Rev. Proc. 2002-9 (as modified by Rev. Proc. 2002-33) is modified by deleting
sections 2.01, 2.02, and 2B of the APPENDIX and replacing them with the text
in, respectively, sections 1, 2, and 3 of the APPENDIX of this revenue
procedure.
.04
Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by deleting
“See § 1.446-1(e)(2)(ii)(b).” and replacing it with
“See § 1.446-1T(e)(2)(ii)(d)(3)(i).”
.05
Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as
follows: “A change in a taxpayer’s treatment of costs paid or incurred to develop,
purchase, lease, or license computer software to a method described in section
5, 6, or.- 6 –7 of this revenue procedure is a change
in method of accounting to which §§ 446 and 481 apply. Further, a change in
useful life under the method described in section 5.01(2) or 6.01(2) of this
revenue procedure is a change in method of accounting. See §
1.446-1T(e)(2)(ii)(d)(3)(i) and, for the effective
date, see § 1.446-1T(e)(4)(ii)(A).”
SECTION 6. EFFECTIVE DATE
.01 In general. Except as provided in section 6.02 of this
revenue procedure, this revenue procedure is effective for a Form 3115 filed
for taxable years ending on or after
.02 Transition rule for previously filed Forms 3115
for automatic consent.
(1)
For a taxable year ending on or after December 30, 2003, a taxpayer may make a
change in method of accounting previously authorized in section 2.01, 2.02, or
2B of the APPENDIX of Rev. Proc. 2002-9 before any amendments were made to
those sections by this revenue procedure if:
(a)
before
(b)
the taxpayer makes that change in method of accounting
in compliance with all the applicable provisions of Rev. Proc. 2002-9 for the
requested year of change (as defined in section 5.02 of Rev. Proc. 2002-9) on
that Form 3115.
(2)
If a taxpayer filed a Form 3115 with the national office to make a change in
method of accounting previously authorized in section 2.01, 2.02, or 2B of the
APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those sections
by this revenue procedure for a year of change for which this revenue procedure
is effective (see section 6.01 of this revenue procedure) and the taxpayer’s
original federal tax return for that year of change was not filed before
December 30, 2003, the taxpayer may make the change in method of accounting
authorized under section 2.01, 2.02, or 2B, as applicable, of the APPENDIX of
Rev. Proc. 2002-9 as revised by this revenue procedure. However, the Service
will process the Form 3115 in accordance with the section of the APPENDIX of
Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed with
the national office by the taxpayer unless on or before the due date (including
extensions) of the taxpayer’s federal tax return for the requested year of
change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115, the
taxpayer completes a new Form 3115 to make the change under section 2.01, 2.02,
or 2B, as applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this
revenue procedure and files this newly completed Form 3115 in duplicate in
accordance with section 6.02(3)(a) of Rev. Proc. 2002-9. Additionally, the
newly completed Form 3115 must include the statement: “Section [insert, as
appropriate: 2.01, 2.02, or 2B] of the APPENDIX of Rev. Proc. 2002-9 as revised
by Rev. Proc. 2004-11.” This statement must be legibly printed or typed on the
appropriate line on, or at the top of page 1 of, the Form 3115.
SECTION 7. DRAFTING INFORMATION
The principal author of this
revenue procedure is Sara Logan of the Office of Associate Chief Counsel
(Passthroughs and Special Industries). For further information regarding this
revenue procedure, contact Ms. Logan or Douglas Kim on (202) 622-3110 (not a
toll free call).
APPENDIX
SECTION 1. Section 2.01 of the
APPENDIX of Rev. Proc 2002-9 is deleted and
replaced with the following:
“.01 Impermissible to permissible method of
accounting for depreciation or amortization.
(1) Description of change and scope.
(a)
Applicability. This change applies to a taxpayer that wants to change from an
impermissible to a permissible method of accounting for depreciation or
amortization (depreciation) for any item of depreciable or amortizable
property:
(i) for which the taxpayer used the impermissible method of
accounting in at least the two taxable years immediately preceding the year of
change (but see section 2.01(1)(b) of this APPENDIX for property placed in
service in the taxable year immediately preceding the year of change);
(ii)
for which the taxpayer is making a change in method of
accounting under § 1.446-1T(e)(2)(ii)(d);
(iii)
for which depreciation is determined under § 56(a)(1),
§ 56(g)(4)(A), § 167, § 168, § 197, § 1400I, § 1400L(b), or § 1400L(c), or
under § 168 prior to its amendment in 1986 (former § 168); and
(iv) that is owned by the taxpayer at the beginning of the
year of change (but see section 2.05 of this APPENDIX for property disposed of
before the year of change).
(b)
Taxpayer has not adopted a method of accounting for the item of property. If a
taxpayer does not satisfy section 2.01(1)(a)(i) of
this APPENDIX for an item of depreciable or amortizable property because this
item of property is placed in service by the taxpayer in the taxable year
immediately preceding the year of change (“1-year depreciable property”), the
taxpayer may change from the impermissible depreciation method to the
permissible depreciation method for the 1-year depreciable property by filing a
Form 3115 for this change, provided the § 481 adjustment reported on the Form
3115 includes the amount of any adjustment that is attributable to all property
(including the 1-year depreciable property) subject to the Form 3115.
Alternatively, the taxpayer may change from the impermissible depreciation
method to the permissible depreciation method for a 1-year depreciable property
by filing an amended federal tax return for the property’s placed-in-service
year prior to the date the taxpayer files its federal tax return for the
taxable year succeeding the placed-in-service year.
(c)
Certain scope limitations inapplicable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue procedure are not applicable to this
change.
(d) Inapplicability. This change does not apply to:
(i) any property to which §
1016(a)(3) (regarding property held by a tax-exempt organization) applies;
(ii)
any taxpayer that is subject to § 263A and that is required to capitalize the
costs with respect to which the taxpayer wants to change its method of
accounting under section 2.01 of this APPENDIX, if the taxpayer is not
capitalizing the costs as required;
(iii)
any property for which a taxpayer is making a change
in depreciation under § 1.446-1T(e)(2)(ii)(d)(2)(vi) or (vii);
(iv)
any property subject to § 167(g) (regarding property
depreciated under the income forecast method);
(v)
any § 1250 property that a taxpayer is reclassifying
to an asset class of Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35,
1983-1 C.B.
745,
as appropriate, that does not explicitly include § 1250 property (for example,
asset class 57.0, Distributive Trades and Services);
(vi)
any property for which a taxpayer is revoking a timely
valid election, or making a late election, under § 167, § 168, § 1400I, §
1400L, former § 168, or § 13261(g)(2) or (3) of the Revenue Reconciliation Act
of 1993 (1993 Act), 1993-3 C.B. 1, 128 (relating to amortizable § 197
intangibles). A taxpayer may request consent to revoke or make the election by
submitting a request for a letter ruling under Rev. Proc. 2003-1, 2003-1 I.R.B.
1 (or any successor). See § 1.446-1T(e)(2)(ii)(d)(3)(iii);
(vii)
any property for which depreciation is determined
under § 56(g)(4)(A) or § 167 (other than under § 168, § 1400I, § 1400L, or
former § 168) and a taxpayer is changing the useful life of the property. A
change in the useful life of property is corrected by adjustments in the
applicable taxable year provided under § 1.446-1T(e)(2)(ii)(d)(3)(i). However, this section 2.01(1)(d)(vii) of this APPENDIX
does not apply if the taxpayer is changing to or from a useful life, recovery
period, or amortization period that is specifically assigned by the Internal
Revenue Code (for example, § 167(f)(1), § 168(c)), the regulations thereunder,
or other guidance published in the Internal Revenue Bulletin and, therefore,
this change is a change in method of accounting (unless section 2.01(1)(d)(xv)
of this APPENDIX applies). See § 1.446-1T(e)(2)(ii)(d)(3)(i);
(viii)
any depreciable property for which the use changes in
the hands of the same taxpayer. See § 1.446-1T(e)(2)(ii)(d)(3)(ii);
(ix)
any property for which depreciation is determined in
accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation
Range System (ADR));
(x)
any change in method of accounting involving a change from deducting the cost
or other basis of any property as an expense to capitalizing and depreciating
the cost or other basis;
(xi)
any change in method of accounting involving a change
from one permissible method of accounting for the property to another
permissible method of accounting for the property. For example:
(A)
a change from the straight-line method of depreciation
to the income forecast method of depreciating for videocassettes. See Rev. Rul.
89-62, 1989-1 C.B. 78; or
(B)
a change from charging the depreciation reserve with costs of removal and
crediting the depreciation reserve with salvage proceeds to deducting costs of
removal as an expense (provided the costs of removal are not required to be
capitalized under any provision of the Code, such as, § 263(a)) and including
salvage proceeds in taxable income (see section 2.02 of this APPENDIX for
making this change for property for which depreciation is determined under §
167);
(xii)
any change in method of accounting involving both a change from treating the
cost or other basis of the property as nondepreciable
or nonamortizable property to treating the cost or
other basis of the property as depreciable or amortizable property and the
adoption of a method of accounting for depreciation requiring an election under
§ 167, § 168, § 1400I, § 1400L(b), former § 168, or § 13261(g)(2) or (3) of the
1993 Act (for example, a change in the treatment of the space consumed in
landfills placed in service in 1990 from nondepreciable
to depreciable property (assuming section 2.01(1)(d)(xiii) of the APPENDIX does
not apply) and the making of an election under § 168(f)(1) to depreciate this
property under the unit of production method of depreciation under § 167);
(xiii)
any change in method of accounting for any item of income or deduction other
than depreciation, even if the change results in a change in computing
depreciation under § 1.446-1T(e)(2)(ii)(d)(2)(i),
(ii), (iii), (iv), (v), (vi), (vii), or (viii). For example, a change in method
of accounting involving:
(A)
a change in inventory costs (for example, when property is reclassified from
inventory property to depreciable property, or vice versa) (but see section
3.02 of this APPENDIX for making a change from inventory property to
depreciable property for unrecoverable line pack gas or unrecoverable cushion
gas); or,
(B)
a change in the character of a transaction from sale
to lease, or vice versa (but see section 2.03 of this APPENDIX for making this
change);
(xiv)
a change from determining depreciation under § 168 to
determining depreciation under former § 168 for any property subject to the
transition rules in § 203(b) or 204(a) of the Tax Reform Act of 1986, 1986-3 (Vol.
1) C.B. 1, 60-80; or
(xv)
any change in the placed-in-service date of a
depreciable or amortizable property. This change is corrected by adjustments in
the applicable taxable year provided under § 1.446-1T(e)(2)(ii)(d)(3)(v).
(2)
Additional requirements. A taxpayer also must comply with the following:
(a)
Permissible method of accounting for depreciation. A taxpayer must change to a
permissible method of accounting for depreciation for the item of depreciable
or amortizable property. The permissible method of accounting is the same
method that determines the depreciation allowable for the item of property (as
provided in section 2.01(5) of this APPENDIX).
(b)
Statements required. A taxpayer must provide the following statements, if
applicable, and attach them to the completed application:
(i) a detailed description of the
former and new methods of accounting. A general description of these methods of
accounting is unacceptable (for example, MACRS to MACRS, erroneous method to
proper method, claiming less than the depreciation allowable to claiming the
depreciation allowable);
(ii)
to the extent not provided elsewhere on the
application, a statement describing the taxpayer’s business or income-producing
activities. Also, if the taxpayer has more than one business or
income-producing activity, a statement describing the taxpayer’s business or
income-producing activity in which the item of property at issue is primarily
used by the taxpayer;
(iii)
to the extent not provided elsewhere on the
application, a statement of the facts and law supporting the new method of
accounting, new classification of the item of property, and new asset class in,
as appropriate, Rev. Proc. 87-56 or Rev. Proc. 83-35. If the taxpayer is the
owner and lessor of the item of property at issue, the statement of the facts
and law supporting the new asset class also must describe the business or
income-producing activity in which that item of property is primarily used by
the lessee;
(iv)
to the extent not provided elsewhere on the
application, a statement identifying the year in which the item of property was
placed in service;
(v)
if the item of property is depreciated under former §
168, a statement identifying the asset class in Rev. Proc. 83-35 that applies
under the taxpayer’s former and new methods of accounting (if none, state and
explain);
(vi)
if any item of property is public utility property
within the meaning of § 168(i)(10) or former §
167(l)(3)(A), as applicable, a statement providing that the taxpayer agrees to
the following additional terms and conditions:
(A)
a normalization method of accounting (within the
meaning of former § 167(l)(3)(G), former § 168(e)(3)(B), or § 168(i)(9), as applicable) will be used for the public utility
property subject to the application;
(B)
as of the beginning of the year of change, the taxpayer will adjust its
deferred tax reserve account or similar reserve account in the taxpayer’s
regulatory books of account by the amount of the deferral of federal income tax
liability associated with the § 481(a) adjustment applicable to the public
utility property subject to the application; and
(C)
within 30 calendar days of filing the federal income
tax return for the year of change, the taxpayer will provide a copy of the
completed application to any regulatory body having jurisdiction over the
public utility property subject to the application;
(vii) if the taxpayer is changing the
classification of an item of
§
1250 property placed in service after
(A)
50 percent or more of the gross revenue generated from the item of § 1250
property is from the sale of petroleum products (not including gross revenue
from related services, such as the labor cost of oil changes and gross revenue
from the sale of nonpetroleum products such as tires
and oil filters),
(B)
50 percent or more of the floor space in the item of property is devoted to the
sale of petroleum products (not including floor space devoted to related
services, such as oil changes and floor space devoted to nonpetroleum
products such as tires and oil filters), or
(C)
the time of § 1250 property is 1,400 square feet or
less.”; and
(viii)
if the taxpayer is changing the classification of an item of property from §
1250 property to § 1245 property under § 168 or former § 168, a statement of
the facts and law supporting the new § 1245 property classification, and a
statement containing the following representation: “Each item of depreciable
property that is the subject of the application filed under section 2.01 of the
APPENDIX of Rev.
Proc.
2002-9 for the year of change beginning [Insert the date], and that is
reclassified from [Insert, as appropriate: nonresidential real property,
residential rental property,
19-year
real property, 18-year real property, or 15-year real property] to an asset
class of [Insert, as appropriate, either: Rev. Proc. 87-56, 1987-2 C.B. 674, or
Rev. Proc. 83-35, 1983-1 C.B. 745] that does not explicitly include § 1250
property, is § 1245 property for depreciation purposes.”
(3)
Section 481(a) adjustment. Because the adjusted basis of the property is
changed as a result of a method change made under section 2.01 of this APPENDIX
(see section 2.01(4) of this APPENDIX), items are duplicated or omitted.
Accordingly, this change is made with a § 481(a) adjustment. This adjustment
may result in either a negative § 481(a) adjustment (a decrease in taxable
income) or a positive § 481(a) adjustment (an increase in taxable income) and
may be a different amount for regular tax, alternative minimum tax, and
adjusted current earnings purposes. This § 481(a) adjustment equals the
difference between the total amount of depreciation taken into account in
computing taxable income for the property under the taxpayer’s former method of
accounting (including the amount attributable to any property described in
section 2.01(1)(b) of this APPENDIX that is included in the taxpayer’s Form
3115), and the total amount of depreciation allowable for the property under
the taxpayer’s new method of accounting (as determined under section 2.01(5) of
this APPENDIX, and including the amount attributable to any property described
in section 2.01(1)(b) of this APPENDIX that is included in the taxpayer’s Form
3115), for open and closed years prior to the year of change. However, the
amount of the § 481(a) adjustment must be adjusted to account for the proper
amount of the depreciation allowable that is required to be capitalized under
any provision of the Code (for example, § 263A) at the beginning of the year of
change.
(4)
Basis adjustment. As of the beginning of the year of change, the basis of
depreciable property to which section 2.01 of this APPENDIX applies must
reflect the reductions required by § 1016(a)(2) for the depreciation allowable
for the property (as determined under section 2.01(5) of this APPENDIX).
(5)
Meaning of depreciation allowable.
(a) In general. Section 2.01(5) of this APPENDIX provides the
amount of the depreciation allowable determined under § 56(a)(1),
§ 56(g)(4)(A), § 167, § 168, § 197, § 1400I, or § 1400L(c), or former § 168.
This amount, however, may be limited by other provisions of the Code (for
example, § 280F).
(b)
Section 56(a)(1) property. The depreciation allowable
for any taxable year for property for which depreciation is determined under §
56(a)(1) is determined by using the depreciation
method, recovery period, and convention provided for under § 56(a)(1) that
applies for the property’s placed-in-service date.
(c)
Section 56(g)(4)(A) property. The depreciation
allowable for any taxable year for property for which depreciation is
determined under § 56(g)(4)(A) is determined by using
the depreciation method, recovery period or useful life, as applicable, and
convention provided for under § 56(g)(4)(A) that applies for the property’s
placed-in-service date.
(d)
Section 167 property. Generally, for any taxable year,
the depreciation allowable for property for which depreciation is determined
under § 167, is determined either:
(i) under the depreciation method
adopted by a taxpayer for the property; or
(ii)
if that depreciation method does not result in a
reasonable allowance for depreciation or a taxpayer has not adopted a
depreciation method for the property, under the straight-line depreciation
method. For determining the estimated useful life and salvage value of the
property, see § 1.167(a)-1(b) and (c), respectively. The depreciation allowable
for any taxable year for property subject to § 167(f) (regarding certain
property excluded from § 197) is determined by using the depreciation method
and useful life prescribed in § 167(f). If computer software is depreciated
under § 167(f)(1) and is qualified property (as
defined in § 168(k)(2) and § 1.168(k)-1T of the temporary Income Tax
Regulations), 50-percent bonus depreciation property (as defined in § 168(k)(4)
and § 1.168(k)-1T), or qualified New
York
Liberty Zone (Liberty Zone) property (as defined in § 1400L(b)(2) and §
1.1400L(b)-1T), the depreciation allowable for that computer software under §
167(f)(1) is also determined by taking into account the additional first year
depreciation deduction provided by § 168(k) or § 1400L(b), as applicable,
unless the taxpayer made a timely valid election not to deduct any additional
first year depreciation for the computer software.
(e)
Section 168 property. The depreciation allowable for
any taxable year for property for which depreciation is determined under § 168,
is determined as follows:
(i) by using either:
(A) the general depreciation system in §
168(a); or
(B)
the alternative depreciation system in § 168(g) if the
property is required to be depreciated under the alternative depreciation
system pursuant to § 168(g)(1) or other provisions of the Code (for example,
property described in § 263A(e)(2)(A) or § 280F(b)(1)). Property required to be
depreciated under the alternative depreciation system pursuant to § 168(g)(1) includes property in a class (as set out in § 168(e))
for which the taxpayer made a timely valid election under § 168(g)(7); and
(ii)
if the property is qualified property, 50-percent bonus depreciation property,
or Liberty Zone property, by taking into account the additional first year
depreciation deduction provided by § 168(k) or § 1400L(b), as applicable,
unless the taxpayer made a timely valid election not to deduct the additional
first year depreciation (or made a deemed election not to deduct the additional
first year depreciation; for further guidance, see Rev. Proc. 2002-33, 2002-1
C.B. 963, or Rev. Proc. 2003-50, 2003-29 I.R.B. 119) for the class of property
(as defined in § 1.168(k)-1T(e)(2) or § 1.1400L(b)-1T(e)(2), as applicable) in
which that property is included.
(f)
Section 197 property. The depreciation allowable for
any taxable year for an amortizable § 197 intangible (including any property
for which a timely election under § 13261(g)(2) of the
1993 Act was made) is determined in accordance with § 1.197-2(f).
(g)
Former § 168 property. The depreciation allowable for any taxable year for
property subject to former § 168 is determined by
using either:
(i) the accelerated method of cost
recovery applicable to the property (for example, for 5-year property, the
recovery method under former § 168(b)(1)); or
(ii)
the straight-line method applicable to the property if
the property is required to be depreciated under the straight-line method (for
example, property described in former § 168(f)(12) or former § 280F(b)(2)) or
if the taxpayer elected to determine the depreciation allowance under the
optional straight-line percentage (for example, the straight-line method in
former § 168(b)(3)).
(h)
Qualified revitalization building. The depreciation allowable for any taxable
year for any qualified revitalization building (as defined in § 1400I(b)(1)) for which the taxpayer has made a timely valid
election under § 1400I(a) is determined as follows:
(i) if the taxpayer elected to deduct one-half of any
qualified revitalization expenditures (as defined in § 1400I(b)(2)) chargeable
to a capital account with respect to the qualified revitalization building for
the taxable year in which the building is placed in service by the taxpayer, the
depreciation allowable for the property’s placed-in-service year is equal to
one-half of the qualified revitalization expenditures for the property and the
depreciation allowable for the remaining recovery period of the property is
determined using the general depreciation system of § 168(a) or the alternative
depreciation system of § 168(g), as applicable; or
(ii)
if the taxpayer elected to amortize all of the
qualified revitalization expenditures chargeable to a capital account with
respect to the qualified revitalization building ratably over the 120-month
period beginning with the month in which the building is placed in service, the
depreciation allowable is determined in accordance with this election.
(i) Qualified New York Liberty Zone
leasehold improvement property. The depreciation allowable for any taxable year
for qualified New York Liberty Zone leasehold improvement property (as defined
in § 1400L(c)(2)) is determined by using the
depreciation method and recovery period prescribed in § 1400L(c).”
SECTION 2. Section 2.02 of the
APPENDIX of Rev. Proc. 2002-9 is deleted and
replaced with the following:
“.02 Permissible to permissible method of accounting
for depreciation.
(1)
Description of change. This change applies to a taxpayer that wants to change
from a permissible method of accounting for depreciation under § 56(g)(4)(A)(iv) or § 167 to another permissible method of
accounting for depreciation under § 56(g)(4)(A)(iv) or § 167. Pursuant to §
1.167(a)-7(a) and (c), a taxpayer may account for depreciable property either
by treating each individual asset as an account or by combining two or more
assets in a single account and, for each account, depreciation allowances are
computed separately.
(2) Scope.
(a)
Applicability. This change applies to any taxpayer wanting to make a change in
method of accounting for depreciation specified in section 2.02(3) of this
APPENDIX for the property in an account:
(i) for which the present and
proposed methods of accounting for depreciation specified in section 2.02(3) of
this APPENDIX are permissible methods for the property under § 56(g)(4)(A)(iv)
or § 167; and
(ii) that is owned by the taxpayer at the beginning of the
year of change.
(b)
Certain scope limitations inapplicable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue procedure are not applicable to this
change.
(c) Inapplicability. This change does not apply to:
(i) any taxpayer that is subject to § 263A and that is
required to capitalize the costs with respect to which the taxpayer wants to
change its method of accounting under section 2.02 of this APPENDIX, if the
taxpayer is not capitalizing the costs as required;
(ii)
any property to which § 1016(a)(3) (regarding property
held by a tax-exempt organization) applies;
(iii)
any property described in § 167(f) (regarding certain
property excluded from § 197);
(iv)
any property subject to § 167(g) (regarding property
depreciated under the income forecast method);
(v)
any property for which depreciation is determined
under § 56(a)(1), § 56(g)(4)(A)(i), (ii), (iii), or
(v), § 168, § 1400I, §1400L(b), or § 1400L(c), or § 168 prior to its amendment
in 1986 (former § 168);
(vi)
any property that the taxpayer elected under §
168(f)(1) or former § 168(e)(2) to exclude from the application of,
respectively, § 168 or former § 168;
(vii)
any property for which depreciation is determined in
accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation
Range System (ADR));
(viii)
any depreciable property for which the taxpayer is
changing the depreciation method pursuant to § 1.167(e)-1T(b) of the temporary
Income Tax Regulations (change from declining-balance method to straight-line
method), § 1.167(e)-1T(c) (certain changes for § 1245 property), or §
1.167(e)-1T(d) (certain changes for § 1250 property). These changes must be
made prospectively and are not permitted under the cited regulations for
property for which the depreciation is determined under § 168, § 1400I, §
1400L, or former § 168; or
(ix)
any distributor commissions (as defined by section 2
of Rev. Proc. 2000-38, 2000-2 C.B. 310) for which the taxpayer is changing the
useful life under the distribution fee period method or the useful life method
(both described in Rev. Proc. 2000-38). A change in this useful life is
corrected by adjustments in the applicable taxable year provided under § 1.446-1T(e)(2)(ii)(d)(3)(i).
(3)
Changes covered. Section 2.02 of this APPENDIX only applies to the following
changes in methods of accounting for depreciation:
(a)
a change from the straight-line method to the sum-of-the-years-digits method,
the sinking fund method, the unit-of-production method, or the
declining-balance method using any proper percentage of the straight-line rate;
(b)
a change from the declining-balance method using any percentage of the
straight-line rate to the sum-of-the-years-digits method, the sinking fund
method, or the declining-balance method using a different proper percentage of
the straight-line rate;
(c)
a change from the sum-of-the-years-digits method to the sinking fund method,
the declining-balance method using any proper percentage of the straight-line
rate, or the straight-line method;
(d)
a change from the unit-of-production method to the
straight-line method;
(e)
a change from the sinking fund method to the straight-line method, the
unit-of-production method, the sum-of-the-years-digits method, or the
declining-balance method using any proper percentage of the straight-line rate;
(f)
a change in the interest factor used in connection with
a compound interest method or sinking fund method;
(g)
a change in averaging convention as set forth in §
1.167(a)-10(b). However, as specifically provided in § 1.167(a)-10(b), in any
taxable year in which an averaging convention substantially distorts the
depreciation allowance for the taxable year, it may not be used (see Rev. Rul.
73-202, 1973-1 C.B. 81);
(h)
a change from charging the depreciation reserve with costs of removal and
crediting the depreciation reserve with salvage proceeds to deducting costs of
removal as an expense and including salvage proceeds in taxable income as set
forth in § 1.167(a)-8(e)(2). See Rev. Rul. 74-455, 1974-2 C.B. 63. This change,
however, may be made under this revenue procedure only if:
(i) the change is applied to all
items in the account for which the change is being made; and
(ii)
the removal costs are not required to be capitalized
under any provision of the Code (for example, § 263(a), 263A, or 280B);
(i) a change from crediting the depreciation reserve with
the salvage proceeds realized on normal retirement sales to computing and
recognizing gains and losses on the sales (see Rev. Rul. 70-165, 1970-1 C.B.
43);
(j)
a change from crediting ordinary income (including the combination method of
crediting the lesser of estimated salvage value or actual salvage proceeds to
the depreciation reserve, with any excess of salvage proceeds over estimated
salvage value credited to ordinary income) with the salvage proceeds realized
on normal retirement sales, to computing and recognizing gains and losses on
the sales (see Rev. Rul. 70-166, 1970-1 C.B. 44);
(k)
a change from item accounting for specific assets to
multiple asset accounting for the same assets, or vice versa;
(l)
a change from one type of multiple asset accounting (pooling) for specific
assets to a different type of multiple asset accounting (pooling) for the same
assets;
(m)
a change from one method described in Rev. Proc. 2000-38 for amortizing
distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2
C.B. 310) to another method described in Rev. Proc. 2000-38 for amortizing
distributor commissions; or
(n)
a change from pooling to a single asset, or vice
versa, for distributor commissions (as defined by section 2 of Rev. Proc. 2000-38,
2000-2 C.B. 310) for which the taxpayer is using the distribution fee period
method or the useful life method (both described in Rev. Proc. 2000-38).
(4)
Additional requirements. A taxpayer also must comply with the following:
(a)
Basis for depreciation. At the beginning of the year of change, the basis for
depreciation of property to which this change applies is the adjusted basis of
the property as provided in § 1011 at the end of the taxable year immediately preceding the year of change (determined under the
taxpayer’s present method of accounting for depreciation). If applicable under
the taxpayer’s proposed method of accounting for depreciation, this adjusted
basis is reduced by the estimated salvage value of the property (for example, a
change to the straight-line method).
(b)
Rate of depreciation. The rate of depreciation for property changed to:
(i) the straight-line or the
sum-of-the-years-digits method of depreciation must be based on the remaining
useful life of the property as of the beginning of the year of change; or
(ii)
the declining-balance method of depreciation must be
based on the useful life of the property measured from the placed-in-service
date, and not the expected remaining life from the date the change becomes
effective.
(c)
Regulatory requirements. For changes in method of depreciation to the
sum-of-the-years-digits or declining-balance method, the property must meet the
requirements of § 1.167(b)-0 or 1.167(c)-1, as appropriate.
(d)
Public utility property. If any item of property is public utility property
within the meaning of former § 167(l)(3)(A), the
taxpayer must attach to the application a statement providing that the taxpayer
agrees to the following additional terms and conditions:
(i) a normalization method of accounting
within the meaning of former § 167(l)(3)(G) will be used for the public utility
property subject to the application; and
(ii)
within 30 calendar days of filing the federal income
tax return for the year of change, the taxpayer will provide a copy of the
completed application to any regulatory body having jurisdiction over the
public utility property subject to the application.
(5)
Section 481(a) adjustment. Because the adjusted basis of the property is not
changed as a result of a method change made under section 2.02 of this
APPENDIX, no items are being duplicated or omitted. Accordingly, no § 481(a)
adjustment is required or necessary.”
SECTION 3. Section 2B of the APPENDIX
of Rev. Proc. 2002-9 is deleted and
replaced with the following:
“SECTION 2B. COMPUTER
SOFTWARE EXPENDITURES (§§ 162, 167, AND
197)
.01 Description of change. This change applies to a
taxpayer that wants to change its method of accounting for the costs of
computer software to a method described in Rev. Proc. 2000-50, 2000-2 C.B. 601. Section 5 of Rev. Proc. 2000-50 describes
the methods applicable to the costs of developing computer software. Section 6
of Rev. Proc. 2000-50 describes the method applicable to the costs of acquired
computer software. Section 7 of Rev. Proc. 2000-50 describes the method
applicable to leased or licensed computer software. If a taxpayer treats the
costs of computer software in accordance with the applicable method described
in Rev. Proc. 2000-50, the Service will not disturb the taxpayer’s treatment of
its costs of computer software.
.02
Scope. This change applies to all costs of computer
software as defined in section 2 of Rev. Proc. 2000-50. However, this change
does not apply to any computer software that is subject to amortization as an
“amortizable section 197 intangible” as defined in § 197(c) and the regulations
thereunder, or to costs that a taxpayer has treated as research and
experimentation expenditures under § 174.
.03
Statement required. If a taxpayer is changing to the
method described in section 5.01(2) of Rev. Proc. 2000-50, the taxpayer must
attach to the application a statement providing the information required in
section 8.02(2) of Rev. Proc. 2000-50.”
SECTION 4. Section 2.05 of the
APPENDIX of Rev. Proc. 2002-9 is added to read as follows:
“.05
Impermissible to permissible method of accounting for depreciation or
amortization for disposed depreciable or amortizable property.
(1)
Description of change. This change applies to a taxpayer that wants to make the
change in method of accounting for depreciation or amortization (depreciation)
provided under section 3 of Rev. Proc. 2004-11, 2004-3 I.R.B.
, for an item of depreciable or amortizable property that has been
disposed of by the taxpayer. Section 3 of Rev. Proc. 2004-11 allows a taxpayer
to make a change in method of accounting for depreciation for the disposed
property if the taxpayer used an impermissible method of accounting for
depreciation for the property under which the taxpayer did not take into
account any depreciation allowance, or did take into account some depreciation
but less than the depreciation allowable, in the year of change (as defined in
section 2.05(3) of this APPENDIX) or any prior taxable year.
(2)
Scope. This change applies to a taxpayer and an item of depreciable or
amortizable property that are within the scope of section 3.01 of Rev. Proc.
2004-11, provided:
(a)
the taxpayer files the original Form 3115 with the
taxpayer’s amended federal tax return for the year of change (as defined in
section 2.05(3) of this APPENDIX) prior to the expiration of the period of
limitation for assessment under
§
6501(a) for the taxable year in which the item of depreciable or amortizable
property was disposed of by the taxpayer; and
(b)
the taxpayer’s amended federal tax return for the year of change (as defined in
section 2.05(3) of this APPENDIX) includes the adjustments to taxable income
and any collateral adjustments to taxable income or tax liability (for example,
adjustments to the amount or character of the gain or loss of the disposed
depreciable or amortizable property) resulting from the change in method of
accounting for depreciation made by the taxpayer under section 2.05 of this
APPENDIX.
(3)
Year of change. The year of change for this change is the taxable year in which
the item of depreciable or amortizable property was disposed of by the
taxpayer.
(4)
Scope limitations inapplicable. The scope limitations in section 4.02 of this
revenue procedure do not apply. If the taxpayer is under examination, before an
appeals office, or before a federal court at the time that a copy of the Form
3115 is filed with the national office, the taxpayer must provide a copy of the
Form 3115 to the examining agent, appeals officer, or counsel for the
government, as appropriate, at the time the copy of the Form 3115 is filed with
the national office. The Form 3115 must contain the name(s) and telephone
number(s) of the examining agent, appeals officer, or counsel for the
government, as appropriate.
(5)
Filing requirements. Notwithstanding section 6.02(3)(a)
of this revenue procedure, a taxpayer making this change must attach the
original Form 3115 to the taxpayer’s timely filed amended federal tax return
for the year of change and must file the required copy (with signature) of the
Form 3115 with the national office no later than when the original Form 3115 is
filed with the amended federal tax return for the year of change.
(6)
Section 481(a) adjustment period. A taxpayer must take the § 481(a) adjustment
into account in the year of change.”