Updated and revised mass automatic accounting method procedure issued.

• Author: Hecimovich, Gary
• Position: IRS Revenue Procedure 98-60

The IRS has issued Rev. Proc. 98-60, which updates and modifies procedures for obtaining automatic consent to an accounting method change. The revised guidance supersedes Rev. Proc. 97-37 and generally applies to automatic method changes made on or after Dec. 21, 1998. Taxpayers that want to make an automatic change in accounting method for a tax year ending on or after Dec. 21, 1998, should do so under the guidance provided by the new procedure.

Rev. Proc. 98-60 retains almost identical procedures and guidance for most of the 25 automatic changes previously addressed by Rev. Proc. 97-37, including the four-year Sec. 481(a) adjustment period. However, the new revenue procedure has added eight new automatic changes, as well as modifying the scope of the depreciation accounting method change. Further, several minor modifications and clarifications have also been made to the predecessor automatic consent procedure.

Eight New "Automatics"

Eight new accounting method changes have been added to those previously authorized by Rev. Proc. 97-37. Many of these accounting method changes were the subject of recent tax legislation or revenue rulings and relate to the accounting method items described below.

1. Year 2000 (Y2K) Costs. Under Rev. Proc. 97-50, costs paid or incurred to convert or replace computer software to recognize dates beginning in the year 2000 should be accounted for as software development or software acquisition costs under the guidance provided in Rev. Proc. 69-21. In Rev. Proc. 69-21, the Service concluded that software development costs so closely resemble the kind of research and experimentation (R&E) expenditures that fall within the purview of Sec. 174 as to warrant similar accounting treatment. Therefore, the costs of

   developing software may be deducted under the taxpayer's current method for deducting R&E costs under Sec. 174. Alternatively, purchased software constitutes a capital expenditure that must be capitalized and amortized over three years under Sec. 167(f). Taxpayers that want to change their current accounting method for Y2K costs to conform to a method described in Section 3 or 4 of Rev. Proc. 69-21 may do so automatically under the general automatic change accounting procedures of Rev. Proc. 98-60. See Section 1.02 of the Appendix to Rev. Proc. 98-60 for further guidance.

2. R&E Expenditures. Taxpayers that want to change their method of accounting for R&E expenditures related to a particular project or projects may automatically change to or from:

   * Deducting such costs in the period paid or incurred under Sec. 174(a);

   * Deferring and amortizing such costs over a period not less than 60 months under Sec. 174(b); and

   * Capitalizing such costs indefinitely under Sec. 263 and Regs. Sec. 1.174-1.

   This accounting method change must be made using a cut-off method (i.e., the new method applies only to all R&E expenditures paid or incurred during the year of change and in subsequent tax years for the particular project or projects for which the change relates). No audit protection is...