June 17, 2022
In May 2021, IRS issued revenue procedures, which modified the Income Tax Regulations for certain foreign corporations to obtain the automatic consent of changing their methods of accounting for depreciation to the alternative depreciation system (ADS). The revenue procedure aimed to release the burden related to the implementation of global intangible low-taxed income (GILTI) by allowing controlled foreign corporations (CFCs) to conform their income, earnings and profits (E&P), and GILTI computations more easily. The automatic accounting method change procedures are effective for a method change form filed on or after May 11, 2021 for a taxable year of a CFC ending before January 1, 2024.
Background
Section 951A requires a United States shareholder of any CFCs that owns the CFC's stock for any taxable year to include the shareholder's GILTI in gross income for such taxable year. To calculate the GILTI inclusion, the U.S. shareholder reduces CFC tested income by the net deemed tangible income return or 10 percent of qualified business asset investment (QBAI). QBAI is determined by the adjusted basis in the specific tangible property by using ADS and by allocating the depreciation deductions.
The revenue procedure generally requires the use of ADS to depreciate tangible property predominantly used outside of the United States during the taxable year. Depreciation under ADS is determined by using the straight-line method of depreciation (without regard to salvage value). However, a foreign corporation (including a CFC) computing its income and E&P may instead apply a depreciation method used in keeping the books of account that it regularly maintains for accounting to its shareholders or a method consistent with the U.S. generally accepted accounting principles (a “non-ADS method”), provided the adjustments required to conform to ADS are not material.
Accounting method change
A taxpayer must receive the consent of the IRS before changing the depreciation method, convention, or recovery period for any asset for federal income tax purposes, whether or not the taxpayer's present method of accounting is proper under the Code or the regulations. A taxpayer must file a Form 3115, Application for Change in Accounting Method, to request the consent to change a method of accounting. This change is applicable to a CFC seeking to change its method of accounting for depreciation for property, which is owned by the CFC at the beginning of the year of change, to the permissible depreciation method, convention, and recovery period prescribed under ADS in determining the CFC's gross and taxable income as well as its E&P. If there’s a change in a CFC’s method of accounting, the difference between the CFC’s income and E&P under the old and the new method must be taken into account as an adjustment.
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