Automatic procedures to change a CFC's depreciation method.

• Author: Meade, Kathleen
• Position: Controlled foreign corporation

On May 11, 2021, the IRS issued Rev. Proc. 2021-26, which contains procedures for certain foreign corporations to obtain automatic consent to change their methods of accounting for depreciation to the alternative depreciation system (ADS). The automatic procedures are intended to reduce the tax-compliance burden associated with implementing the global intangible low-taxed income (GILTI) final regulations by enabling taxpayers to more easily conform their income, earnings and profits (E&P), and GILTI computations. The revenue procedure also modifies certain special rules applicable to foreign corporations under existing method change procedures.

Background

The GILTI provisions, found in Sec. 951A, apply to tax years of foreign corporations beginning after Dec. 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

Sec. 951A requires a U.S. shareholder of any controlled foreign corporation (CFC) that owns the CFC's stock for any tax year to include the shareholder's GILTI in gross income for such tax year. (Definitions of relevant terms are found in Sec. 951(b), Sec. 957(a), and Sec. 958(a).)

A U.S. shareholder determines GILTI using a formula based on certain items of each CFC that the shareholder owns, including tested income, tested loss, and qualified business asset investment (QBAI), if any.

Sec. 951A(d)(3) provides that the adjusted basis in any property for purposes of calculating QBAI shall be determined by using ADS under Sec. 168(g).

In the preamble of the final GILTI regulations (T.D. 9866) issued on June 21, 2019, the IRS noted that CFCs not otherwise required to compute income and E&P using ADS depreciation methods may want to change to the ADS method, given the requirement to use the ADS method to determine QBAI. The IRS further stated its intention to issue guidance expanding the availability of automatic consent procedures to facilitate such depreciation changes.

Rev. Proc. 2021-26, the focus here, provides the procedural guidance for automatic method changes discussed in the preamble to the final GILTI regulations.

New temporary automatic ADS method change for CFCs

Rev. Proc. 2021-26 provides a new automatic change, for a limited period, permitting a CFC on an impermissible non-ADS method as well as a CFC on a permissible non-ADS method to obtain automatic consent to change its method of accounting to the ADS method for certain tangible property used predominantly...