Depreciation method changes.

• Author: Schwartzman, Randy A.

The IRS recently released final, temporary and proposed regulations specifying when changes in depreciation and amortization will be considered accounting-method changes under Sec. 446 (TD 9307, 12/22/06). The rules also reflect the Service's attempt to provide more consistent treatment and increased certainty for taxpayers on depreciation or amortization. As more changes qualify, it should reduce controversy as to what qualifies for automatic accounting-method changes. Moreover, these rules expand on and solidify the ability to incorporate the results of cost-segregation studies into favorable accounting-method-change requests. When applicable, these requests could result in immediate current tax benefits for taxpayers.

Accounting-Method Changes

Regs. Sec. 1.446-1(e)(2)(ii)(d)(2) retains the rules in the temporary regulations providing that changes in depreciation constitute accounting-method changes under Sec. 446(e). These include a change in the treatment of an asset from nondepreciable or nonamortizable to depreciable or amortizable, or vice versa. Additionally, a correction to require depreciation in lieu of a deduction for the cost of depreciable or amortizable assets that had been consistently treated as an expense in the year of purchase (or vice versa) is an accounting-method change. There may be significant application of this rule as a result of the recently issued rules on capitalization of tangible property and rotating spare parts.

Changes in computing depreciation generally are accounting-method changes, including a change in depreciation method, recovery period or convention of a depreciable or amortizable asset and, under certain circumstances, a change to or from claiming additional first-year depreciation. Depreciation changes due to posting or mathematical errors or changes in underlying facts are not accounting-method changes.

Not Accounting-Method Changes

Regs. Sec. 1.446-1(e)(2)(ii)(d)(3)(i) retains the rule from the temporary regulations that an accounting-method change does not include an adjustment in the useful life of a depreciable or amortizable asset for which depredation is determined, unless the taxpayer is changing to or from a useful life (or recovery or amortization period) specifically assigned by the Code, the regulations or other guidance published in the Internal Revenue Bulletin.

Regs. Sec. 1.446-1(e)(2)(ii)(d)(5) (iv) also retains the rules as to when an adjustment in useful life that is not an...