Latest News Surrounding Accounting Method Changes, Safe Harbor, Depreciation, and Research Tax Credit

Change to Accounting Methods to Comply with the New Tangible Property Regulations

The IRS recently issued two revenue procedures that primarily compile the rules for requesting consent to change accounting methods for depreciation to comply with the new tangible property regulations. The revenue procedures were nearly a combined 900 pages long. The timing for issuing this guidance couldn't have been worse. Taxpayers are already struggling to comply with the new tangible property regulations and the Form 3115 requirements and adding this guidance just prior to the start of the tax filing season has only made compliance even more difficult. To remedy this, the IRS has now released Rev. Proc. 2015-13, 2015-5 I.R.B. 419, which basically says that taxpayers can follow the older guidance (Rev. Proc. 2011-14) or the new guidance (Rev. Proc. 2015-13) for 2014 tax returns.

Safe Harbor Revenue Procedures

The IRS has been working with a number of industry groups to craft safe harbor revenue procedures that would make it easier for taxpayers in the particular industries to comply with the new tangible property regulations. These revenue procedures are intended to make it easier for taxpayers to comply with the new regulations. The IRS recently announced that it is finalizing a new revenue procedure for the oil and gas industry. The revenue procedure is expected to provide definitions of the units of property for gas pipelines and will provide further insight as to how the IRS expects taxpayers to apply the unit of property rules to taxpayers in other industries.

When Depreciation is First Available

Questions often arise as to when depreciation is first available in situations where taxpayers construct or build the depreciable property. The U.S. District Court for the Western District of Louisiana addressed this issue in Stine, LLC vs. United States in the context of the special 50% Go Zone depreciation deduction for property placed in service in Louisiana. The facts were that the taxpayer was in the process of constructing buildings that would be used for retail operations and had been issued a certificate of occupancy before the buildings were available for public use. The taxpayer was successful in arguing that the buildings were placed in service when the buildings were substantially complete and that this was when they were available to store and house equipment, racks, shelving and merchandise–not the time when the buildings were in a state that the retail operations were open for business.

Research Tax Credit

The Eleventh Circuit Court of Appeals issued an opinion in Geosyntec Consultants, Inc. v. United States, No. 14-11107, that is a must read for any taxpayer who takes research tax credits for work performed for others (or who intends to take credits). This group includes architect and engineering, computer and software consulting, and defense contracting firms–among others. The case examines one aspect of the funded research limitation. This rule generally precludes taxpayers from taking credit for research if the taxpayer does not bear the financial risk for the research. The appeal only addresses research performed under cost reimbursement contracts (the research the taxpayer performed under fixed-fee contracts was allowed by the lower court). The appeals court concludes that, with the cost reimbursement contracts it considered, the financial risk to perform at the taxpayers cost in the event the research fails is not sufficient if the contract does not tie payment to the delivery of a product or producing a result. The court concludes that only terms that condition receipt of payment or retention of advanced payments is sufficient. Taxpayers who take research tax credits or who intend to take credits for research performed for others should consult with their tax advisers in light of this case.


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