Revised Automatic Change of Accounting Procedure Provided for Corporations Revoking S Status and Changing from Overall Cash to Overall Accrual Method
Congress anticipated that, due to the reduction of the corporate tax rate found in the Tax Cuts and Jobs Act (TCJA), certain S corporations would wish to terminate their election to become a C corporation. Because of this, Congress added certain special rules that would apply to S corporations that revoked their status within two years of the date of enactment of TCJA.
One of these provisions is found at IRC §481(d) which now reads as follows:
(d) Adjustments attributable to conversion from S corporation to C corporation
(1) In general
In the case of an eligible terminated S corporation, any adjustment required by subsection (a)(2) which is attributable to such corporation’s revocation described in paragraph (2)(A)(ii) shall be taken into account ratably during the 6-taxable year period beginning with the year of change.
(2) Eligible terminated S corporation
For purposes of this subsection, the term “eligible terminated S corporation” means any C corporation—
(A) which—
(i) was an S corporation on the day before the date of the enactment of the Tax Cuts and Jobs Act, and
(ii) during the 2-year period beginning on the date of such enactment makes a revocation of its election under section 1362(a), and
(B) the owners of the stock of which, determined on the date such revocation is made, are the same owners (and in identical proportions) as on the date of such enactment.
The IRS issued Revenue Procedure 2018-44 to modify the automatic change provision found in Revenue Procedure 2018-31 at Section 15.01 that provides automatic changes for certain taxpayers who want to change their method of accounting from the cash method to the overall accrual method. This modification takes into account the extended six-year change period provided for in IRC §481(d).
The Procedure describes the modifications as follows:
This revenue procedure provides that an eligible terminated S corporation required to change from the cash method to an accrual method as a result of a revocation of its S corporation election, and that makes this change in method of accounting under section 15.01 of Rev. Proc. 2018-31 for the first taxable year that it is a C corporation, must take the resulting positive or negative adjustment required by § 481(a)(2) into account ratably during the six-year period beginning with the year of change. See § 481(d)(1). This revenue procedure also allows an eligible terminated S corporation that is permitted to continue to use the cash method after the revocation of its S corporation election and that changes to an accrual method under section 15.01 of Rev. Proc. 2018-31 for the first taxable year that it is a C corporation, to take the resulting positive or negative adjustment required by § 481(a)(2) into account ratably during the six-year period beginning with the year of change. See § 1.446-1(e)(3)(ii).[1]
The procedure also notes that it does not cover any other changes in method that may be triggered by the change in S corporation status.[2]
Specifically, revised Section 15.01(3)(a)(ii)(A) provide the following required spread period for those S corporations subject to the special rule that are required to change to the overall accrual method of accounting, providing for a mandatory 6-year spread of the adjustment:
(A) Required spread period. Pursuant to § 481(d)(1), an eligible terminated S corporation required to change to an overall accrual method as a result of a revocation of its S corporation election that changes its method of accounting under this section 15.01 in the C corporation’s first taxable year after such revocation, takes into account the resulting positive or negative adjustment required by § 481(a)(2) ratably during the six-year period beginning with the year of change.[3]
If the change to the overall accrual method is not required, but the S corporation elects to make the change at this time, the corporation is offered an option of either a 4- or 6-year spread for the adjustment in revised Section 15.01(30(a)(ii)(B):
(B) Optional six-year spread period. An eligible terminated S corporation that is permitted to continue to use the overall cash method after the revocation of its S corporation election, and that changes to an overall accrual method under this section 15.01 in the C corporation’s first taxable year after such revocation, may take into account the resulting positive or negative adjustment required by § 481(a)(2) ratably during the six-year period beginning with the year of change instead of using the adjustment periods provided in section 7.03(1) of Rev. Proc. 2015-13. An eligible terminated S corporation that wants to use this six-year spread period must indicate in the statement required by Line 26 of Form 3115 (Rev. December 2015) that it is making the change in method of accounting with the spread period permitted under this section 15.01(3)(a)(ii)(B) on its timely filed Form 3115.[4]