Coddington Tax Services Closed for New Consulting Clients

 On July 29th, 2024, 2021, I accepted a new role at the Internal Revenue Service. 

While I will continue to keep this blog up indefinitely for reference purposes, the information is now several years old and you should not rely on any information found here.

Best regards,

-Brian

Taxpayer Certainty and Disaster Tax Relief Act of 2020

 On December 27th, 2020, the President signed into law a spending bill that included the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This new law includes several relevant tax extenders and technical corrections.

1. Section 102 of the act permanently extended the Code section 179D deduction for energy efficient commercial property. For property placed in service post-December 31, 2020, the deduction amounts will now be indexed for inflation. The Secretarys of Treasury and Energy will also be able to affirm new, updated energy savings standards. These standards will be no newer than two years prior to the beginning of construction of the building. 

2. Sections 146, 137, and 138 of the act provide a one-year extension of the Code section 45L, 3-year racehorses, and Indian reservation property. 

3. Section 115 of the act provides a five-year extension of 7-year recovery period for motorsports complexes. 

4. Section 2020 of the act provides a 30-year ADS recovery period for pre-2018 residential rental property with a section 163(j)(7)(B) election. This standardizes the recovery period for all residential rental property subject to the real property trade or business election for unlimited interest deductions. Without this change, pre-2018 residential rental property used a 4--yea recovery period. Since this is structured as a technical correction of the TCJA, I anticipate the Service will issue transitional guidance that allows taxpayers to treat this as a method change and file a Form 3115 OR allow an amended return.

5. Section 132  provides a two-year extension of various provisions of the section 48 energy credit. 

Random Tax Research Tips

Many tax practitioners use Google as their first or primary tax research resource. Even though I pay for the truly excellent Lexis Advance Tax research platform, when I look up a Code section or Treasury regulation,  I usually start by googling the citation and clicking on the Cornell website. But this isn't about me, it's a tax research tip. Here's how to do this:

1. Google your citation. For example, if I want to look up Code section 472, I would search for <IRC 472> (without brockets). This will usually take you directly to a link to Cornell. 
2. If you are searching for a Code section under 100 or so, you might get spurious results related to Internet Relay Chat or something else that uses the "IRC" acronym. As you train Google, these will go away at the top of your search results.
3. When searching for Treasury regulations, you can use "Reg 1.472-1" or "26 CFR 1.472-1". You can even search for "1.472-1", but some browsers interpet this as math and only show that result, resulting in extra clicks to get where you need to go. 
4. If the Reg cite has a letter in it, Google will usually interpret that appropriately. This search for the bonus depreciation regs is a good example. This does not always work. Google interprets (i) as an imaginary number. A search for the MACRS LKE regs yields a calculator as the top result.
5. If you do not know how to find the Code section you need, try Googling your search term(s) and add either "IRC" or "Code section" (or even "Code §") to your search.
6. If you click on the LMGTFY links in the last sentence, you can see that these lead to different results when searching for LIFO. 
7. The first two lead you directly to where you need to be. The third one does not, at least not in the top results. 
8. When searching for something, you might need to use different search terms, because writers cite the Code (or regs) in different ways. 
9. Sometimes it helps to restrict your search to the IRS website. You can do this by adding <site:irs.gov> (without brockets) to the search. For example, here is our earlier search for LIFO. This did not take you directly to the Cornell website, of course, but it does provide enough information to figure out the Code section. Eventually.
10. When looking for a Code section, I do not find restricting the search to the IRS website to be very helpful. For more complicated searches where I am not looking for a Code section, it can be very useful.

Clarification on TCJA and the Cash Method

Last Friday, the Service released CCA 202002013, which clarifies the impact of the TCJA on cash basis taxpayers. The issue is fairly simple. In the TCJA, Congress modified certain rules in Code section 451. This Code section provides the general rules to determine when taxpayers must include an item in gross income. Congress made substantial modifications to the rules under this section for accrual basis taxpayers. The question the Service addressed was whether this also affected when cash basis taxpayers take into account income. The answer was "no".

While this may seem like a straightforward issue, many practitioners have been confused by these new provisions. This has been especially true when the taxpayer has an AFS and uses accrual for book and cash for tax.

New Final and Proposed TCJA 100% Bonus Depreciation Regs Effective Dates

Today, the Federal Register's Public Inspection desk published advance copies of Treasury Decision 9874 and REG-106808-19, final bonus depreciation regulations and new, proposed bonus depreciation regulations, respectively. These regulation packages are scheduled to be published in the Federal Register on September 24, 2019.

Final Regulations Effective Date

The final regulations will be effective when published in the Federal Register, which is scheduled to be on September 24, 2019.

Proposed Regulations Reliance Date

The proposed regulations provide that taxpayers may rely on them prior to the eventual publication of final regulations in the Federal Register. If a taxpayer chooses to rely on these proposed regulations, they must rely on these proposed regulations in their entirety, i.e. there is no picking and choosing provisions upon which to rely. The different provisions in the proposed regulations have slightly different effective dates for reliance.

• The General Rule. Taxpayers may rely on these regulations for qualified property acquired and placed in service or planted or grafted after September 27, 2017 for taxable years ending on or after September 28, 2017.
• The Rule for Components. If a taxpayer constructs a larger, self-constructed property and the manufacture, construction, or production began before September 28, 2017, taxpayers may rely on these proposed regulations for components that are qualified property acquired or self-constructed after September 27, 2017 in taxable years ending on or after September 28, 2017.

Impact of the Effective Dates

Because these regulation packages will be published in between the 9/16 and 10/15 deadlines, tax practitioners may need to discuss the disparate impact of these regulations on pass-through entities and C corporations/individuals. For example, consider an individual taxpayer that treated all floor plan financing interest as taken into account and the taxpayer owns both C- and S-corp auto dealerships. The entity returns have or will be filed at the extended filing deadlines. In this situation, the S-corp returns may have different filing positions for 2018 due to the unavailability of these new proposed regulations at the 9/16 filing deadline! How can this be fixed?

For some issues, such as claiming bonus depreciation for auto dealerships above the interest cap by permanently forgoing interest deductions, taxpayers may need to amend their previously filed 2018 tax returns. For other areas, taxpayers may be able to amend their 2018 tax returns or file a Form 3115, Application for Change in Accounting Method under the previously issued Rev. Proc. 2019-33 to make certain late elections or revoke certain elections under the TCJA bonus depreciation rules. In many other areas, taxpayers may be able to file a Form 3115 under the one-year rule of section 6.01 of Rev. Proc. 2018-31 with their 2019 tax returns to comply with these regulations. This would apply to the example in the previous paragraph. Alternatively, the taxpayer could amend their 2018 return prior to filing their 2019 return.

If you need assistance with these issues, please feel free to reach out to me. My contact information can be found here.

Rev. Proc. 2018-40

On August 20th, 2018, the Service published Rev. Proc. 2018-40 in the Internal Revenue Bulletin. This revenue procedure modifies Rev. Proc. 2018-31 to include the new small taxpayer accounting method changes from the TCJA. These changes affect non-tax shelter taxpayerswith less than $25 million in average, annual gross receipts over the prior three years, (determined at the single employer level).  Generally, non-tax shelter taxpayers with less than $25 million in average, annual gross receipts are permitted to use the cash method, avoid UNICAP, avoid the PCM, and either treat inventory as non-incidental materials & supplies or follow their book inventory method. It is important to note that the aggregation rules of section 448(c) apply notwithstanding the language in the revenue procedure that appears to apply the test at the taxpayer level.

The TCJA and Contribution in Aid of Construction

Section 13312 of the Tax Cuts and Jobs Act substantially overhauled section 118 of the Internal Revenue Code. This relatively unpopular Code section fulfills a somewhat unique role. It allows corporations to exclude certain payments from gross income. These payments reduce the taxpayer's basis in the assets to which the payments relate. (For a more in-depth discussion of section 118, the underlying proposed regulations issued in 2000, found here, provide a very good overview.) Over the last decade, the Service has often been involved in contentious disputes over section 118's scope. These controversies usually focus on  a specific class of nonshareholder contributions to capital, contributions in aid of construction, and whether the case law permits non-corporate taxpayers to use an approach like section 118.

In overhauling section 118, Congress provided that contributions in aid of construction as a (potential) customer or any contribution by a governmental entity or civic group (other than as a shareholder) would no longer qualify as non-shareholder contributions to capital. In the legislative history, the Conference Committee went on to explain that it intends for the provision to continue apply only to corporations. The act is generally effective for contributions made after December 22, 2017, with some exceptions for Master Development Plans approved by governmental entities prior to that date. Why does this matter?

For many years, taxpayers have been applying this nonshareholder contribution to capital approach to non-corporate entities' contributions in aid of construction. They exclude the contribution from income and reduce the basis of the related assets. Word on the street has been that, as of last year, only one of the Big 4 firms would even write opinions blessing this approach. Gven the much lower income tax rates going forward and the 2.5% asset limitation for under section 199A, it might be advisable for passthrough entities who have taken this approach to file Form 3115, Application for Change in Accounting Method to reduce their IRS audit risk.

If you have passthrough entity clients who have received substantial payments from government entities to pay for construction and the payments were excluded from gross income and the bases of the related assets reduced by the amount of the payments, please feel free to contact me about making this method change.

Continued Live blog of the bill's tax accounting provisions

1. Qualified Leasehold Improvement Property, Qualified Retail Property, and Qualified Restaurant Property are axed in favor of Qualified Improvement Property starting in 2018.

2. Electing Real Property Trades or Businesses form a new class mandatory ADS property starting in 2018.

3. Research and experimentation expenses now must be amortized over five years, unless they are for specified foreign research, in which case the period rises to fifteen years. This starts in 2022.

4. The development of new software is now defined as an R&E expense. This also starts in 2022.

5. The accrual method has been modified so that income cannot be delayed any later than when it is included for financial income reporting purposes. Rev Proc 2004-34 has been made into a statute. These rules apply starting in 2018.

6. Interest is now limited to the business interest income plus 30% of the adjusted taxable income of the taxpayer plus the floor plan finance interest of the taxpayer. Small taxpayers that meet the $25 million test are exempt from this limit.

7. The Section 199 DPAD is repealed.

Overview of the Tax Cuts and Jobs Act Conference Report's Tax Accounting Provisions

If you don't have it already, you can find the bill here.

1. Section 179. Following the Senate version, the Section 179 expensing dollar limitation increases to $1 million and the phaseout (reduction in limitation) increases to $2.5 million. In a new development, the MACRS' Qualified Improvement Property is now Qualified Real Property for section 179 purposes. So are roofs, HVAC, fire protection and alarm systems, and security systems if they are subsequent improvements to nonresidential real estate. In another new development, the section 179 exclusion for property used in lodging has been repealed. This means that section 179 will not be available for section 1245 property used in residential rental property. These provisions are effective for tax years beginning after 12/31/2017. 

2. Increased Cash Method Availability and Related Rules. The conference report follows the House version of the bill and increases the availability of the cash method of accounting to taxpayers with $25 million or less in average annual gross receipts. This provision is now adjusted for inflation. Section 263A "UNICAP" no longer applies to taxpayers that meet the $25 million test. Similarly, section 471 is modified so that the Service may no longer force taxpayers to use inventories (and the accrual method of accounting) if they meet the $25 million test. Taxpayers who meet the $25 million test will also be allowed to treat inventory as non-incidental materials and supplies, (similar to how Revenue Procedures 2001-10 and 2002-28 currently work), OR are permitted to use an inventory method that conforms to their financial accounting method or, if they don't have financials, their book method. There will also be a similar exemption from the Percentage Completion Method for taxpayers with long-term contracts. All of these provisions will apply across entity types (including sole proprietorships) and will be available in tax years beginning after 12/31/2017.

3. 100% Expensing. Bonus depreciation goes to 100% in 2018 with a 20% per year drawdown starting in 2023. Bonus depreciation will now be available for used property not previously used by the taxpayer and that was not acquired from certain related parties or the basis of which is not determined with reference to the adjusted basis in the hands of another taxpayer (including the basis step-up of property received from a decedent). Taxpayers involved in real property trades or businesses or who have certain floorplan financing arrangements. The new 100% bonus rules generally apply for property placed-in-service after September 27, 2017 so long as the property was not acquired before September 28, 2017. 

California Announces Revision to Method Change Policy

Yesterday, the California FTB issued FTB Notice 2017-03. In this notice, the FTB announced that it was withdrawing FTB Notice 96-3 and will now follow the federal Rev. Proc. 2016-29. This notice was issued to clear up confusion regarding the application of Notice 96-3.

Overview. In FTB Notice 96-3, the FTB announced that it would not follow IRS Rev Proc 96-31. This revenue procedure allowed taxpayers to obtain automatic consent to change their accounting methods when they claimed less than the depreciation allowable. This procedure was republished with slight modifications in IRS Rev Proc 97-37. In IRS Rev Proc 98-60, the procedure was modified so that taxpayers could obtain automatic consent both when they claimed less than the depreciation allowable and when they claimed more. (With slight modifications, this procedure can now be found in section 6.01 of IRS Rev. Proc. 2017-30, which is the quite recent replacement of Rev. Proc. 2016-29.)  In FTB Notice 2000-8, the FTB announced their general policy under which taxpayers could obtain consent to change their accounting methods for California tax purposes. This notice was generally understood as permitting Federal method changes for California tax purposes under California's "deemed election" provisions of Revenue and Taxation Code sections 17024.5 and 23051.5 when there was no conflict between California and Federal tax laws, which was generally the case for non-C corp taxpayers seeking depreciation method changes.

In discussing the new notice with its author, I have learned that the FTB always took the position that Notice 96-3 applied only to Rev. Proc. 96-31 and did not apply to Rev. Proc. 97-37 and its successors. Therefore, the general understanding of Notice 2000-8 was the correct interpretation.

Practice Tips

1. The federal automatic consent change procedures are strict compliance procedures. See Hawse v. Comm'r, T.C. Memo 2015-99, at 22. Even though the IRS may not have rejected an automatic consent Form 3115, the taxpayer may not have received IRS consent to make the change. Id. at 24. Since California's deemed election rules require a "proper election filed with the Internal Revenue Service in accordance with the Internal Revenue Code or regulations", automatic consent Forms 3115 that comply with some, but not all, of the requirements of the automatic change procedures are vulnerable to FTB examination changes.

This is relevant to this topic because many depreciation method changes arise from cost segregation studies. In my experience, most practitioners omit some of the required statements for certain depreciation method changes. When filing a Form 3115 to implement a cost segregation study, practitioners most often omit the statement required under section 6.01(3)(b)(vii) of Rev. Proc. 2017-30 (and predecessors). (This section requires a statement of the facts and law supporting the new classification of each section 1245 asset.)

2. Taxpayers may continue to rely on FTB Notice 2000-8 to request different accounting methods for California purposes than the ones they elect for Federal purposes.

New List of Automatic Changes

Since the Service severed the list of automatic changes from the procedural rules for automatic method changes, they are now free to more frequently update that list. Today that happened with the release of an advance copy of Revenue Procedure 16-29 (and just in time for the ABA Tax Section's May Meeting.) Practitioners should take care not to rely on this advance copy after the final version is published in the Internal Revenue Bulletin. After May 23rd, when googling Rev. Proc. 16-29, always remember to append "IRB" to the search.

Quick notes:

1. Effective Date. The new rev proc is generally effective for Forms 3115 filed on or after May 5, 2016. 
2. Transition Relief. Taxpayers with pending nonautomatic Forms 3115 filed before May 5, 2016 where the change now qualifies as automatic have until June 6, 2016 or, if later, the date of the letter granting or denying consent to make the change, to ask their National Office contact to change to the automatic consent procedures. The National Office will then send an acknowledgement letter. The taxpayer will then have until the earlier of 30 days from the date of that letter or date they must file the Covington copy of the Form 3115. For automatic changes that are now nonautomatic, the transition relief varies depending on the change.
3. Significant changes.
• Lots of housekeeping to remove defunct TPR provisions.
• Changes to comply with section 267(a)(3) now are exempt from the five-year item and five-year overall method eligibility rules.
• Changes to the PCM under section 1.460-4(b) are now nonautomatic.
• Changes from all impermissible inventory valuation and identification methods under section 471 are now automatic. 
• Certain depreciation-related method changes are now scoped out if the taxpayer claimed a tax credit on the item's cost.
• New changes related to the Retail Inventory Method, section 195 start-up costs, and UNICAP interest capitalization.
• An extension of the five-year item eligibility waiver for certain changes, mostly TPR-related. 

Final thoughts on Liveblogging the IRS TPR Webinar

The Service still dances around the big issue that Rev. Proc. 2015-56 brought to the world's attention, (though it has been discussed among practitioners for quite some time): How does section 263A work with section 263(a)? Is it an independent capitalization provision whose "installation" and "construction" rules trump the rules for repairs under the TPR? If so, how and when?

I expect this issue to be addressed at the ABA Tax Section Midyear Meeting in a couple of weeks, but, given the lack of even informal guidance from the Service, most taxpayers and practitioners will be left wondering how the rules work for some time. Speaking of the ABA Tax Section, the Capital Recovery & Leasing committee hosted a wonderful panel on this issue last fall at the ABA Tax Section Joint Fall Meeting.Unfortunately, the panel did not resolve how the two Code section interact. My impression was that, if taxpayer-favorable guidance is not forthcoming, this issue will be litigated sooner rather than later.

Even More IRS TPR Liveblogging

IRS is now clarifying what most of us took for a mistake in an answer by an IRS presenter at the previous presentation of this webinar. Shingles could be a capitalizable restoration or betterment in certain circumstances. But the replacement of just the shingles often would be a repair.

More liveblogging TPR Webinar

My first question gets answered re: RP 2015-20 and its presumptive use.  Merrill Feldstein says a post-2014 method change would be nonautomatic (until the expiration of the 5-year item eligibility rule) and that only 2014 and later costs would qualify.

To return to the possibility of the presumption being rebuttable, I think that many taxpayers will have a tough time demonstrating that the presumption does not apply. I have thoughts on how to do so, but can't cover while liveblogging.

Liveblogging the IRS TPR Webinar (Pt 3)

Jill El-Bendary of SBSE states that inventoriable items treated as nonincidental materials and supplies under Rev. Proc. 2002-28 are not eligible for the DMSH. The same applies to Rev. Proc. 2001-10.

Liveblogging IRS TPR Webinar (pt 2)

Merrill Feldstein of Chief Counsel says that taxpayers can amend returns back to 2012 to use the higher DMSH threshold if the DMSH was elected on the original return and the taxpayer had in place procedures at the beginning of that year to expense the item under its book policy (and did deduct it for book purposes).

IRS TPR Webinar - Liveblogging

The Service presenter just confirmed that if a taxpayer qualifies to use Rev. Proc. 2015-20 and did nothing, they will be presumed to have elected into its provisions.This isn't the worst case scenario, since the presumption would presumably be rebuttable. It just means that the taxpayer will have to pay for additional factual development to demonstrate that not only that it did nothing, but that it has not changed its methods of accounting if it wants to make a covered method change and take into account pre-2014 amounts in its section 481(a) adjustment.

New Automatic Change Form 3115 Mailing Address

On January 4th, 2016, the Service published Internal Revenue Bulletin 2016-1. This issue of the IRB contains Rev. Proc. 2015-1, which provides the general procedural rules for private letter ruling requests, accounting method changes, and other filings. Notable updates include:

• The nonautomatic accounting method application fee remains the same as last year: $8600.
• As anticipated based on the draft Form 3115 instructions, automatic method changes have a new mailing address:

          Internal Revenue Service 

          201 West Rivercenter Blvd.

          PIN Team Mail Stop 97

          Covington, KY 41011-1424  

• Rev. Proc. 2015-13 has been updated to change "Ogden copy" to "Duplicate copy".

        It is not clear whether accounting method change filers should use the new address yet. Section 18 of the revenue procedure provides that it is effective January 4th, 2016. The IRS Form 3115 website, however, has not yet been updated to reflect the new address. I have inquired about the filing address, but I suspect that we will not know the proper filing address until January 20th, during the Service's next TPR webinar.

Cumulative Bulletin Past Editions Available via GPO

PDF versions of the 1919-2008 Cumulative Bulletins are now available for free on the GPO website. Just search for <title:"Internal Revenue Cumulative Bulletin"> at the GPO website. How come the most important free resources seldom get mentioned?

Suggested FAQs for the IRS - TPR

Recently, another practitioner informed his peers that the Service is collecting suggested questions for its FAQ on the Tangible Property Regulations. Below the fold are questions I have collected from many practitioners online and in practice. If you have additional questions you would like for me to submit, please comment on this post or email me directly. The comments are moderated, so your post may not show up immediately.