Form 3115, Change of Accounting Method
and Rev. Proc. 2008-52
 
Written by: Steven D. Beaucaire, MST
Director - Tax | Bedford Cost Segregation, LLC

Whenever the IRS issues a new Revenue Procedure, there is a flurry of activity in the world of accounting. This latest document, issued August 18, 2008, is designed to first and foremost, consolidate multiple modifications of the original Revenue Procedure 2002-9 (automatic change in accounting method), and secondly, increase the number of accounting methods that can be changed under the automatic consent procedures. Even with 284 pages of technical tax language, it has boiled down to very few changes for those taking advantage of cost segregation studies (CSS). Our job here is to understand the changes that do affect taxpayers and their advisors using a CSS.

As before, Form 3115, officially titled “Application for Change in Accounting Method”, can be filed under two different Revenue Procedures (Rev. Procs.) The focus of this article is the automatic change of accounting method covered in Rev. Proc. 2008-52. Announcement 2008-84 issued August 29, 2008, impacts all Forms 3115 filed after September 15, 2008, for tax years ending on or after December 31, 2007. Changes pertaining to depreciation are within the scope of this Rev. Proc., as they were in its predecessor, and therefore, cost segregation studies are included as well. Essentially, what we are referring to are look-back studies, where the assets were placed in service in prior years. To effect this change, Form 3115 is due with the tax return for the year of change, including extensions. Taxpayers cannot file a late Form 3115 nor file Form 3115 after the tax return for the year. A separate copy of the Form 3115 is filed with the Automatic Rulings Branch of the IRS in Washington, D.C. Taxpayers will need the advance permission of the IRS to change accounting methods. As long as the change is covered in the Rev. Proc. and the Form 3115 and attachments are completed properly, the IRS consent is automatic. Again, this remains as it was in the old Rev. Proc.

The new parts of the Rev. Proc. are the additional methods for which you no longer need consent of the IRS. So let’s take a look at a few (not all) of the new items now included as automatic changes:

1. lessor improvements abandoned at termination of lease
2. from depreciating land (or nondepreciable land improvement) to not depreciating them
3. to capitalize and depreciate repairable and reusable spare parts from the cash method to an accrual method for specific items
4. to timing of incurring liabilities for employee bonuses and vacation pay under Code Sec. 461.

Other changes include the assignment of specific numeric codes to each item included in this Rev. Proc. and changes not related to CSS that are beyond the scope of this article.

Normally it is necessary for an asset to be in service for two years in order to establish a method of accounting. In real terms, it means that two tax returns have been filed with depreciation from that asset included in the return. However, the IRS will let you file a change of accounting method even if the asset has only been in service for one year. Actually, you have the option of filing an amended return or the Form 3115. This was previously allowed in Rev. Proc. 2007-16 but has now been included in Rev. Proc. 2008-52. You have no other option for an asset in service for two years or more; a Form 3115 is mandatory.

In order to correct the depreciation not taken in prior years, or taken in excess, one is required to calculate a §481(a) adjustment. Despite the imposing name, this is only a catch-up adjustment. It is calculated by subtracting the accumulated depreciation at the beginning of the year of change (old depreciation) from the new accumulated depreciation at the beginning of the year of change, calculated after the CSS. The first number is what you have already taken, while the second is calculated as if the CSS had been done in year one. This is then listed on the “other deductions” line of your tax return. The current year depreciation is flowed through the Form 4562 as normal. Note that if the adjustment is positive (income generating), it is spread over four years. If it is negative (a deduction), it must be taken in one year. This too has been moved from another Rev. Proc. (2002-19) and is now included in Rev. Proc. 2008-52. As of now, there are no options on when you make the adjustment. It must be done in one year or four years.

There are very few times in life that one gets to have a “do-over” where the taxpayer reaps significant benefits. At Bedford Cost Segregation, we like to remind people that a cost segregation study coupled with a change of accounting method offers you just that. In spite of changes in the new IRS Revenue Procedures, none of the advantages of a CSS have been lost.