78066 Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Rules and Regulations 

* * * * * 

By direction of the Commission. 

C. Landis Plummer, 

Acting Secretary. 

[FR Doc. 06–9901 Filed 12–27–06; 8:45 am] 

BILLING CODE 6750–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9307] 

RIN 1545–BC18 

Changes in Computing Depreciation 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final and temporary 

regulations. 

SUMMARY: This document contains 

regulations relating to a change in 

computing depreciation or amortization 

as well as a change from a 

nondepreciable or nonamortizable asset 

to a depreciable or amortizable asset (or 

vice versa). Specifically, these 

regulations provide guidance to any 

taxpayer that makes a change in 

depreciation or amortization on whether 

such a change is a change in method of 

accounting under section 446(e) of the 

Internal Revenue Code and on the 

application of section 1016(a)(2) in 

determining whether the change is a 

change in method of accounting. 

DATES: Effective Date. These regulations 

are effective December 28, 2006. 

Applicability Dates. For dates of 

applicability, see §§ 1.167(e)–1(e), 

1.446–1(e)(4), and 1.1016–3(j). 

FOR FURTHER INFORMATION CONTACT: 

Douglas H. Kim, (202) 622–3110 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains amendments 

to 26 CFR part 1. On January 2, 2004, 

the IRS and Treasury Department 

published temporary regulations (TD 

9105) in the Federal Register (69 FR 5) 

relating to the application of section 

446(e) of the Internal Revenue Code 

(Code) and § 1.167(e)–1 to a change in 

depreciation or amortization and the 

application of section 1016(a)(2) in 

determining whether a change in 

depreciation or amortization is a change 

in method of accounting. On the same 

date, the IRS published a notice of 

proposed rulemaking (REG–126459–03) 

cross-referencing the temporary 

regulations in the Federal Register (69 

FR 42). No public hearing was requested 

or held. Several comments responding 

to the notice of proposed rulemaking 

were received. After consideration of all 

the comments, the proposed regulations 

are adopted as amended by this 

Treasury decision, and the 

corresponding temporary regulations are 

removed. The revisions are discussed 

here in this preamble. 

Section 1400N(d), which was added 

to the Code by section 101(a) of the Gulf 

Opportunity Zone Act of 2005, Public 

Law 109–135 (119 Stat. 2577), generally 

allows a 50-percent additional first year 

depreciation deduction for qualified 

Gulf Opportunity Zone property. The 

final regulations reflect the enactment of 

section 1400N(d). 

Explanation of Provisions 

Scope 

The final regulations provide the 

changes in depreciation or amortization 

(depreciation) for property for which 

depreciation is determined under 

section 167, 168, 197, 1400I, 1400L(b), 

1400L(c), or 1400N(d), or former section 

168, of the Code that are, and those 

changes that are not, changes in method 

of accounting under section 446(e). The 

final regulations also clarify that the 

rules in § 1.167(e)–1 with respect to a 

change in the depreciation method 

made without the consent of the 

Commissioner apply only to property 

for which depreciation is determined 

under section 167 (other than under 

section 168, 1400I, 1400L, or 1400N(d), 

or former section 168). Additionally, the 

final regulations provide that section 

1016(a)(2) does not permanently affect a 

taxpayer’s lifetime income for purposes 

of determining whether a change in 

depreciation is a change in method of 

accounting under section 446(e) and 

§ 1.446–1(e). 

I. Changes in Depreciation Method 

Under Section 167 

The final regulations retain the rules 

contained in the temporary regulations 

providing that the rules in § 1.167(e)–1 

with respect to a change in depreciation 

method under § 1.167(e)–1(b), (c), and 

(d) made without the consent of the 

Commissioner apply only to property 

for which depreciation is determined 

under section 167 (other than under 

section 168, 1400I, 1400L, or 1400N(d), 

or former section 168). No comments 

were received suggesting changes to 

these rules. 

II. Changes in Depreciation That Are, 

and Are Not, a Change in Method of 

Accounting Under Section 446(e) 

The final regulations provide rules on 

the changes in depreciation that are, and 

are not, a change in method of 

accounting under section 446(e). 

A. Changes in Depreciation That Are 

Changes in Method of Accounting 

The final regulations retain the rules 

contained in the temporary regulations 

providing the changes in depreciation 

that are a change in method of 

accounting under section 446(e). These 

changes are 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 a change in method of 

accounting. Further, changes in 

computing depreciation generally are a 

change in method of accounting, 

including a change in the depreciation 

method, period of recovery, or 

convention of a depreciable or 

amortizable asset, and a change to or 

from claiming the additional first year 

depreciation deduction provided by 

section 168(k), 1400L(b), or 1400N(d) 

under certain circumstances. 

No comments were received 

suggesting changes to these rules. 

However, a commentator inquired 

whether a calendar-year taxpayer that 

has not claimed the 30-percent 

additional first year depreciation for 

qualified property acquired after 

September 10, 2001, and placed in 

service prior to January 1, 2002, may 

claim the 30-percent additional first 

year depreciation by requesting a 

change in method of accounting. To 

claim the 30-percent additional first 

year depreciation for this property, Rev. 

Proc. 2003–50 (2003–2 C.B. 119) 

provides that the taxpayer had to file an 

amended return on or before December 

31, 2003, or file a Form 3115, 

‘‘Application for Change in Accounting 

Method,’’ with the taxpayer’s timely 

filed 2003 Federal tax return. If the 

taxpayer did not file this amended 

return or Form 3115, the taxpayer has 

made the deemed election not to deduct 

the additional first year depreciation for 

the 2001 taxable year. Accordingly, the 

taxpayer’s change to claiming the 30- 

percent additional first year 

depreciation for qualified property 

placed in service in the taxable year that 

included September 11, 2001, is not a 

change in method of accounting under 


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Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Rules and Regulations 78067 

the temporary and final regulations. 

Instead, the taxpayer must file a request 

for a letter ruling to revoke the election. 

Another commentator questioned 

whether the temporary regulations 

affected the procedures for obtaining 

consent to make a change in method of 

accounting. The regulations did not 

change these procedures and, 

accordingly, the rules in § 1.446–1(e)(3) 

apply to a change in depreciation that 

is a change in method of accounting. 

Other commentators inquired whether a 

change in depreciation due to a posting 

or mathematical error, or a change in 

underlying facts, is a change in method 

of accounting. A change in depreciation 

due to a posting or mathematical error, 

or a change in underlying facts, is not 

a change in method of accounting 

because the rules in § 1.446–1(e)(2)(ii)(a) 

and (b) also apply to a change in 

depreciation. Accordingly, the final 

regulations clarify this point. 

B. Changes in Depreciation That Are 

Not Changes in Method of Accounting 

The final regulations retain the rule 

contained in the temporary regulations 

that a change in method of accounting 

does not include an adjustment in the 

useful life of a depreciable or 

amortizable asset for which depreciation 

is determined under section 167 (other 

than under section 168, 1400I, 1400L, or 

1400N(d), or former section 168). This 

rule does not apply, however, if a 

taxpayer is changing to or from a useful 

life (or recovery period or amortization 

period) that is specifically assigned by 

the Code, the regulations under the 

Code, or other guidance published in 

the Internal Revenue Bulletin. Several 

commentators questioned whether the 

useful life exception from change in 

method of accounting treatment that 

was in effect before the issuance of the 

temporary regulations has any 

remaining application. Section 1.446–

1(e)(2)(ii)(b), as in effect before the 

issuance of the temporary regulations 

(see § 1.446–1(e) as contained in 26 CFR 

part 1 edition revised as of April 1, 

2003), provided that a change in the 

method of accounting does not include 

an adjustment in the useful life of a 

depreciable asset. The rule still applies 

but is limited by the temporary and final 

regulations to only a depreciable or 

amortizable asset for which depreciation 

is determined under section 167 (other 

than under section 168, 1400I, 1400L, or 

1400N(d), or former section 168) and to 

only an adjustment in useful life that is 

not specifically assigned by the Code, 

the regulations under the Code, or other 

guidance published in the Internal 

Revenue Bulletin. 

The final regulations also retain the 

rules contained in the temporary 

regulations of when an adjustment in 

useful life that is not a change in 

method of accounting is implemented. 

The final regulations clarify that these 

rules apply regardless of whether the 

adjustment in useful life is initiated by 

the IRS or a taxpayer. Furthermore, the 

final regulations clarify that in 

implementing an adjustment in useful 

life that is not a change in method of 

accounting, no section 481 adjustment 

is required or permitted. 

The final regulations retain the rule 

contained in the temporary regulations 

providing that the making of a late 

depreciation election or the revocation 

of a timely valid depreciation election is 

not a change in method of accounting, 

except as otherwise provided by the 

Code, the regulations under the Code, or 

other guidance published in the Internal 

Revenue Bulletin. A commentator 

inquired whether a late section 179 

election may be made by requesting a 

change in method of accounting. Under 

section 179 and the regulations under 

section 179, a late section 179 election 

generally is made by submitting a 

request for a letter ruling. However, for 

a taxable year beginning after 2002 and 

before 2010, a taxpayer may make a 

section 179 election by filing an 

amended return. Accordingly, the IRS 

and Treasury Department have included 

a cross-reference to section 179(c) and 

§ 1.179–5. 

The final regulations retain the rule 

contained in the temporary regulations 

providing that any change in the placedin-service date of a depreciable or 

amortizable asset is not treated as a 

change in method of accounting. The 

final regulations, however, clarify that 

this rule does not apply when the Code, 

the regulations under the Code, or other 

guidance published in the Internal 

Revenue Bulletin, provide that a change 

in placed-in-service date is treated as a 

change in method of accounting. A 

commentator requested that the final 

regulations clarify what constitutes a 

change in placed-in-service date. To 

illustrate the rule, the IRS and Treasury 

Department provided additional 

clarification in the final regulations. For 

example, the final regulations provide 

that if a taxpayer changes the placed-inservice date of a depreciable or 

amortizable asset because the taxpayer 

incorrectly determined the date on 

which the asset was placed in service, 

this change is not a change in method 

of accounting. However, if a taxpayer 

incorrectly determines that a 

depreciable or amortizable asset is 

nondepreciable property and later 

changes the treatment of the asset to 

depreciable property, this change is not 

a change in the placed-in-service date of 

the asset but is a change from 

nondepreciable to depreciable property 

and, therefore, the change is a change in 

method of accounting. The final 

regulations also clarify that a change in 

the convention of a depreciable or 

amortizable asset is not a change in the 

placed-in-service date of the asset and, 

therefore, is a change in method of 

accounting. Additionally, the final 

regulations provide examples 

illustrating what constitutes a change in 

placed-in-service date. 

The final regulations retain the rules 

contained in the temporary regulations 

as to how and when a change in placedin-service date that is not a change in 

method of accounting is implemented. 

The final regulations also clarify that 

these rules apply regardless of whether 

the change in placed-in-service date is 

made by the IRS or a taxpayer. Finally, 

the final regulations provide that in 

implementing a change in placed-inservice date that is not a change in 

method of accounting, no section 481 

adjustment is required or permitted. 

C. Item Being Changed 

The final regulations retain the rule 

contained in the temporary regulations 

providing that for purposes of a change 

in depreciation, the item being changed 

is the depreciation treatment of each 

individual depreciable or amortizable 

asset or the depreciation treatment of 

each vintage account with respect to a 

depreciable asset for which depreciation 

is determined under § 1.167(a)–11 

(CLADR). Because general asset 

accounts and mass asset accounts are 

similar to vintage accounts, the final 

regulations clarify that the item is the 

depreciable treatment of each general 

asset account with respect to a 

depreciable asset for which general asset 

account treatment has been elected 

under section 168(i)(4) or the item is the 

depreciation treatment of each mass 

asset account with respect to a 

depreciable asset for which mass asset 

account treatment has been elected 

under former section 168(d)(2)(A). The 

final regulations also retain the rule 

contained in the temporary regulations 

providing that a change in depreciation 

under section 167 (other than under 

section 168, 1400I, 1400L, or 1400N(d), 

or former section 168) is permitted only 

with respect to all assets in a particular 

account (as defined in § 1.167(a)–7) or 

vintage account. 

D. Effective Dates 

Several commentators questioned the 

application of the effective date of the 

temporary regulations. In response, the 


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78068 Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Rules and Regulations 

IRS, in Chief Counsel Notice 2004–007 

(CC–2004–007, January 28, 2004) and 

Chief Counsel Notice 2004–024 (CC–

2004–024, July 12, 2004) (see 

www.irs.gov/foia), clarified that the 

temporary regulations apply to property 

placed in service in a taxable year 

ending on or after December 30, 2003. 

In accordance with this clarification, the 

final regulations apply only to a change 

in depreciation made by a taxpayer for 

a depreciable or amortizable asset 

placed in service by the taxpayer in a 

taxable year ending on or after 

December 30, 2003, regardless of 

whether or not the change in 

depreciation is a change in method of 

accounting. Additionally, the examples 

in the final regulations relating to a 

change in depreciation have been 

revised to reflect this effective date. 

III. Application of Section 1016(a)(2) to 

a Change in Method of Accounting 

The final regulations contain the same 

rule as the temporary regulations, 

providing that section 1016(a)(2) does 

not permanently affect a taxpayer’s 

lifetime income for purposes of 

determining whether a change in 

depreciation for property subject to 

section 167, 168, 1400I, 1400L, or 

1400N(d), or former section 168, is a 

change in method of accounting under 

section 446(e) and the regulations under 

section 446(e). No comments were 

received suggesting changes to this rule. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations and, because these 

regulations do not impose on small 

entities a collection of information 

requirement, the Regulatory Flexibility 

Act (5 U.S.C. chapter 6) does not apply. 

Therefore, a Regulatory Flexibility 

Analysis is not required. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking was submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on its impact on small 

business. 

Drafting Information 

The principal author of these 

regulations is Douglas H. Kim, Office of 

Associate Chief Counsel (Passthroughs 

and Special Industries). However, other 

personnel from the IRS and Treasury 

Department participated in their 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.167(e)–1 is amended 

by revising paragraphs (a) and (e) to 

read as follows: 

§ 1.167(e)-1 Change in method. 

(a) In general. (1) Any change in the 

method of computing the depreciation 

allowances with respect to a particular 

account (other than a change in method 

permitted or required by reason of the 

operation of former section 167(j)(2) and 

§ 1.167(j)–3(c)) is a change in method of 

accounting, and such a change will be 

permitted only with the consent of the 

Commissioner, except that certain 

changes to the straight line method of 

depreciation will be permitted without 

consent as provided in former section 

167(e)(1), (2), and (3). Except as 

provided in paragraphs (c) and (d) of 

this section, a change in method of 

computing depreciation will be 

permitted only with respect to all the 

assets contained in a particular account 

as defined in § 1.167(a)–7. Any change 

in the percentage of the current straight 

line rate under the declining balance 

method, for example, from 200 percent 

of the straight line rate to any other 

percent of the straight line rate, or any 

change in the interest factor used in 

connection with a compound interest or 

sinking fund method, will constitute a 

change in method of depreciation. Any 

request for a change in method of 

depreciation shall be made in 

accordance with section 446(e) and the 

regulations under section 446(e). For 

rules covering the use of depreciation 

methods by acquiring corporations in 

the case of certain corporate 

acquisitions, see section 381(c)(6) and 

the regulations under section 381(c)(6). 

(2) Paragraphs (b), (c), and (d) of this 

section apply to property for which 

depreciation is determined under 

section 167 (other than under section 

168, section 1400I, section 1400L(c), 

under section 168 prior to its 

amendment by the Tax Reform Act of 

1986 (100 Stat. 2121), or under an 

additional first year depreciation 

deduction provision (for example, 

section 168(k), 1400L(b), or 1400N(d))) 

of the Internal Revenue Code. 

* * * * * 

(e) Effective date. This section applies 

on or after December 30, 2003. For the 

applicability of regulations before 

December 30, 2003, see § 1.167(e)–1 in 

effect prior to December 30, 2003 

(§ 1.167(e)–1 as contained in 26 CFR 

part 1 edition revised as of April 1, 

2003). 

§ 1.167(e)–1T [Removed] 

■ Par. 3. Section 1.167(e)–1T is 

removed. 

■ Par. 4. Section 1.168(i)–4 is amended 

as follows: 

■ 1. Paragraph (f) is amended by 

removing the language ‘‘§ 1.446–

1T(e)(2)(ii)(d)(3)(ii)’’ at the end of the 

paragraph and adding ‘‘§ 1.446–

1(e)(2)(ii)(d)(3)(ii)’’ in its place. 

■ 2. Paragraph (g)(2)(ii) is amended by 

removing the language ‘‘as modified by 

Rev. Proc. 2004–11 (2004–3 I.R.B. 311).’’

■ Par. 5. Section 1.168(i)–6T is 

amended as follows: 

■ 1. Paragraph (k)(2)(i) is amended by 

removing the language ‘‘§ 1.446–

1T(e)(3)(ii)’’ and adding ‘‘§ 1.446–

1(e)(3)(ii)’’ in its place. 

■ 2. The last sentence in paragraph 

(k)(2)(ii) is amended by removing the 

language ‘‘§ 1.446–1T(e)(3)(ii)’’ and 

adding ‘‘§ 1.446–1(e)(3)(ii)’’ in its place. 

■ Par. 6. Section 1.446–1 is amended by 

revising paragraphs (e)(2)(ii)(a), 

(e)(2)(ii)(b), (e)(2)(ii)(d), (e)(2)(iii), and 

(e)(4) to read as follows: 

§ 1.446–1 General rule for methods of 

accounting. 

* * * * * 

(e) * * * 

(2) * * * 

(ii) (a) A change in the method of 

accounting includes a change in the 

overall plan of accounting for gross 

income or deductions or a change in the 

treatment of any material item used in 

such overall plan. Although a method of 

accounting may exist under this 

definition without the necessity of a 

pattern of consistent treatment of an 

item, in most instances a method of 

accounting is not established for an item 

without such consistent treatment. A 

material item is any item that involves 

the proper time for the inclusion of the 

item in income or the taking of a 

deduction. Changes in method of 

accounting include a change from the 

cash receipts and disbursement method 

to an accrual method, or vice versa, a 

change involving the method or basis 

used in the valuation of inventories (see 

sections 471 and 472 and the 

regulations under sections 471 and 472), 


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a change from the cash or accrual 

method to a long-term contract method, 

or vice versa (see § 1.460–4), certain 

changes in computing depreciation or 

amortization (see paragraph (e)(2)(ii)(d) 

of this section), a change involving the 

adoption, use or discontinuance of any 

other specialized method of computing 

taxable income, such as the crop 

method, and a change where the 

Internal Revenue Code and regulations 

under the Internal Revenue Code 

specifically require that the consent of 

the Commissioner must be obtained 

before adopting such a change. 

(b) A change in method of accounting 

does not include correction of 

mathematical or posting errors, or errors 

in the computation of tax liability (such 

as errors in computation of the foreign 

tax credit, net operating loss, percentage 

depletion, or investment credit). Also, a 

change in method of accounting does 

not include adjustment of any item of 

income or deduction that does not 

involve the proper time for the 

inclusion of the item of income or the 

taking of a deduction. For example, 

corrections of items that are deducted as 

interest or salary, but that are in fact 

payments of dividends, and of items 

that are deducted as business expenses, 

but that are in fact personal expenses, 

are not changes in method of 

accounting. In addition, a change in the 

method of accounting does not include 

an adjustment with respect to the 

addition to a reserve for bad debts. 

Although such adjustment may involve 

the question of the proper time for the 

taking of a deduction, such items are 

traditionally corrected by adjustment in 

the current and future years. For the 

treatment of the adjustment of the 

addition to a bad debt reserve (for 

example, for banks under section 585 of 

the Internal Revenue Code), see the 

regulations under section 166 of the 

Internal Revenue Code. A change in the 

method of accounting also does not 

include a change in treatment resulting 

from a change in underlying facts. For 

further guidance on changes involving 

depreciable or amortizable assets, see 

paragraph (e)(2)(ii)(d) of this section and 

§ 1.1016–3(h). 

* * * * * 

(d) Changes involving depreciable or 

amortizable assets—(1) Scope. This 

paragraph (e)(2)(ii)(d) applies to 

property subject to section 167, 168, 

197, 1400I, 1400L(c), to section 168 

prior to its amendment by the Tax 

Reform Act of 1986 (100 Stat. 2121) 

(former section 168), or to an additional 

first year depreciation deduction 

provision of the Internal Revenue Code 

(for example, section 168(k), 1400L(b), 

or 1400N(d)). 

(2) Changes in depreciation or 

amortization that are a change in 

method of accounting. Except as 

provided in paragraph (e)(2)(ii)(d)(3) of 

this section, a change in the treatment 

of an asset from nondepreciable or 

nonamortizable to depreciable or 

amortizable, or vice versa, is a change in 

method of accounting. Additionally, a 

correction to require depreciation or 

amortization 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 a change in method of 

accounting. Further, except as provided 

in paragraph (e)(2)(ii)(d)(3) of this 

section, the following changes in 

computing depreciation or amortization 

are a change in method of accounting: 

(i) A change in the depreciation or 

amortization method, period of 

recovery, or convention of a depreciable 

or amortizable asset. 

(ii) A change from not claiming to 

claiming the additional first year 

depreciation deduction provided by, for 

example, section 168(k), 1400L(b), or 

1400N(d), for, and the resulting change 

to the amount otherwise allowable as a 

depreciation deduction for the 

remaining adjusted depreciable basis (or 

similar basis) of, depreciable property 

that qualifies for the additional first year 

depreciation deduction (for example, 

qualified property, 50-percent bonus 

depreciation property, qualified New 

York Liberty Zone property, or qualified 

Gulf Opportunity Zone property), 

provided the taxpayer did not make the 

election out of the additional first year 

depreciation deduction (or did not make 

a deemed election out of the additional 

first year depreciation deduction; for 

further guidance, for example, see Rev. 

Proc. 2002–33 (2002–1 C.B. 963), Rev. 

Proc. 2003–50 (2003–2 C.B. 119), Notice 

2006–77 (2006–40 I.R.B. 590), and 

§ 601.601(d)(2)(ii)(b) of this chapter) for 

the class of property in which the 

depreciable property that qualifies for 

the additional first year depreciation 

deduction (for example, qualified 

property, 50-percent bonus depreciation 

property, qualified New York Liberty 

Zone property, or qualified Gulf 

Opportunity Zone property) is included. 

(iii) A change from claiming the 30- 

percent additional first year 

depreciation deduction to claiming the 

50-percent additional first year 

depreciation deduction for depreciable 

property that qualifies for the 50-percent 

additional first year depreciation 

deduction, provided the property is not 

included in any class of property for 

which the taxpayer elected the 30- 

percent, instead of the 50-percent, 

additional first year depreciation 

deduction (for example, 50-percent 

bonus depreciation property or qualified 

Gulf Opportunity Zone property), or a 

change from claiming the 50-percent 

additional first year depreciation 

deduction to claiming the 30-percent 

additional first year depreciation 

deduction for depreciable property that 

qualifies for the 30-percent additional 

first year depreciation deduction, 

including property that is included in a 

class of property for which the taxpayer 

elected the 30-percent, instead of the 50- 

percent, additional first year 

depreciation deduction (for example, 

qualified property or qualified New 

York Liberty Zone property), and the 

resulting change to the amount 

otherwise allowable as a depreciation 

deduction for the property’s remaining 

adjusted depreciable basis (or similar 

basis). This paragraph (e)(2)(ii)(d)(2)(iii) 

does not apply if a taxpayer is making 

a late election or revoking a timely valid 

election under the applicable additional 

first year depreciation deduction 

provision of the Internal Revenue Code 

(for example, section 168(k), 1400L(b), 

or 1400N(d)) (see paragraph 

(e)(2)(ii)(d)(3)(iii) of this section). 

(iv) A change from claiming to not 

claiming the additional first year 

depreciation deduction for an asset that 

does not qualify for the additional first 

year depreciation deduction, including 

an asset that is included in a class of 

property for which the taxpayer elected 

not to claim any additional first year 

depreciation deduction (for example, an 

asset that is not qualified property, 50- 

percent bonus depreciation property, 

qualified New York Liberty Zone 

property, or qualified Gulf Opportunity 

Zone property), and the resulting 

change to the amount otherwise 

allowable as a depreciation deduction 

for the property’s depreciable basis. 

(v) A change in salvage value to zero 

for a depreciable or amortizable asset for 

which the salvage value is expressly 

treated as zero by the Internal Revenue 

Code (for example, section 168(b)(4)), 

the regulations under the Internal 

Revenue Code (for example, § 1.197–

2(f)(1)(ii)), or other guidance published 

in the Internal Revenue Bulletin. 

(vi) A change in the accounting for 

depreciable or amortizable assets from a 

single asset account to a multiple asset 

account (pooling), or vice versa, or from 

one type of multiple asset account 

(pooling) to a different type of multiple 

asset account (pooling). 

(vii) For depreciable or amortizable 

assets that are mass assets accounted for 

in multiple asset accounts or pools, a 

change in the method of identifying 


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which assets have been disposed. For 

purposes of this paragraph 

(e)(2)(ii)(d)(2)(vii), the term mass assets 

means a mass or group of individual 

items of depreciable or amortizable 

assets that are not necessarily 

homogeneous, each of which is minor in 

value relative to the total value of the 

mass or group, numerous in quantity, 

usually accounted for only on a total 

dollar or quantity basis, with respect to 

which separate identification is 

impracticable, and placed in service in 

the same taxable year. 

(viii) Any other change in 

depreciation or amortization as the 

Secretary may designate by publication 

in the Federal Register or in the Internal 

Revenue Bulletin (see § 601.601(d)(2) of 

this chapter). 

(3) Changes in depreciation or 

amortization that are not a change in 

method of accounting. Section 1.446–

1(e)(2)(ii)(b) applies to determine 

whether a change in depreciation or 

amortization is not a change in method 

of accounting. Further, the following 

changes in depreciation or amortization 

are not a change in method of 

accounting: 

(i) Useful life. An adjustment in the 

useful life of a depreciable or 

amortizable asset for which depreciation 

is determined under section 167 (other 

than under section 168, section 1400I, 

section 1400L(c), former section 168, or 

an additional first year depreciation 

deduction provision of the Internal 

Revenue Code (for example, section 

168(k), 1400L(b), or 1400N(d))) is not a 

change in method of accounting. This 

paragraph (e)(2)(ii)(d)(3)(i) does not 

apply if a taxpayer is changing to or 

from a useful life (or recovery period or 

amortization period) that is specifically 

assigned by the Internal Revenue Code 

(for example, section 167(f)(1), section 

168(c), section 168(g)(2) or (3), section 

197), the regulations under the Internal 

Revenue Code, or other guidance 

published in the Internal Revenue 

Bulletin and, therefore, such change is 

a change in method of accounting 

(unless paragraph (e)(2)(ii)(d)(3)(v) of 

this section applies). See paragraph 

(e)(2)(ii)(d)(5)(iv) of this section for 

determining the taxable year in which to 

correct an adjustment in useful life that 

is not a change in method of accounting. 

(ii) Change in use. A change in 

computing depreciation or amortization 

allowances in the taxable year in which 

the use of an asset changes in the hands 

of the same taxpayer is not a change in 

method of accounting. 

(iii) Elections. Generally, the making 

of a late depreciation or amortization 

election or the revocation of a timely 

valid depreciation or amortization 

election is not a change in method of 

accounting, except as otherwise 

expressly provided by the Internal 

Revenue Code, the regulations under the 

Internal Revenue Code, or other 

guidance published in the Internal 

Revenue Bulletin. This paragraph 

(e)(2)(ii)(d)(3)(iii) also applies to making 

a late election or revoking a timely valid 

election made under section 13261(g)(2) 

or (3) of the Revenue Reconciliation Act 

of 1993 (107 Stat. 312, 540) (relating to 

amortizable section 197 intangibles). A 

taxpayer may request consent to make a 

late election or revoke a timely valid 

election by submitting a request for a 

private letter ruling. For making or 

revoking an election under section 179 

of the Internal Revenue Code, see 

section 179(c) and § 1.179–5. 

(iv) Salvage value. Except as provided 

under paragraph (e)(2)(ii)(d)(2)(v) of this 

section, a change in salvage value of a 

depreciable or amortizable asset is not 

treated as a change in method of 

accounting. 

(v) Placed-in-service date. Except as 

otherwise expressly provided by the 

Internal Revenue Code, the regulations 

under the Internal Revenue Code, or 

other guidance published in the Internal 

Revenue Bulletin, any change in the 

placed-in-service date of a depreciable 

or amortizable asset is not treated as a 

change in method of accounting. For 

example, if a taxpayer changes the 

placed-in-service date of a depreciable 

or amortizable asset because the 

taxpayer incorrectly determined the 

date on which the asset was placed in 

service, such a change is a change in the 

placed-in-service date of the asset and, 

therefore, is not a change in method of 

accounting. However, if a taxpayer 

incorrectly determines that a 

depreciable or amortizable asset is 

nondepreciable property and later 

changes the treatment of the asset to 

depreciable property, such a change is 

not a change in the placed-in-service 

date of the asset and, therefore, is a 

change in method of accounting under 

paragraph (e)(2)(ii)(d)(2) of this section. 

Further, a change in the convention of 

a depreciable or amortizable asset is not 

a change in the placed-in-service date of 

the asset and, therefore, is a change in 

method of accounting under paragraph 

(e)(2)(ii)(d)(2)(i) of this section. See 

paragraph (e)(2)(ii)(d)(5)(v) of this 

section for determining the taxable year 

in which to make a change in the 

placed-in-service date of a depreciable 

or amortizable asset that is not a change 

in method of accounting. 

(vi) Any other change in depreciation 

or amortization as the Secretary may 

designate by publication in the Federal 

Register or in the Internal Revenue 

Bulletin (see § 601.601(d)(2) of this 

chapter). 

(4) Item being changed. For purposes 

of a change in depreciation or 

amortization to which this paragraph 

(e)(2)(ii)(d) applies, the item being 

changed generally is the depreciation 

treatment of each individual depreciable 

or amortizable asset. However, the item 

is the depreciation treatment of each 

vintage account with respect to a 

depreciable asset for which depreciation 

is determined under § 1.167(a)–11 (class 

life asset depreciation range (CLADR) 

property). Similarly, the item is the 

depreciable treatment of each general 

asset account with respect to a 

depreciable asset for which general asset 

account treatment has been elected 

under section 168(i)(4) or the item is the 

depreciation treatment of each mass 

asset account with respect to a 

depreciable asset for which mass asset 

account treatment has been elected 

under former section 168(d)(2)(A). 

Further, a change in computing 

depreciation or amortization under 

section 167 (other than under section 

168, section 1400I, section 1400L(c), 

former section 168, or an additional first 

year depreciation deduction provision 

of the Internal Revenue Code (for 

example, section 168(k), 1400L(b), or 

1400N(d))) is permitted only with 

respect to all assets in a particular 

account (as defined in § 1.167(a)–7) or 

vintage account. 

(5) Special rules. For purposes of a 

change in depreciation or amortization 

to which this paragraph (e)(2)(ii)(d) 

applies—

(i) Declining balance method to the 

straight line method for MACRS 

property. For tangible, depreciable 

property subject to section 168 (MACRS 

property) that is depreciated using the 

200-percent or 150-percent declining 

balance method of depreciation under 

section 168(b)(1) or (2), a taxpayer may 

change without the consent of the 

Commissioner from the declining 

balance method of depreciation to the 

straight line method of depreciation in 

the first taxable year in which the use 

of the straight line method with respect 

to the adjusted depreciable basis of the 

MACRS property as of the beginning of 

that year will yield a depreciation 

allowance that is greater than the 

depreciation allowance yielded by the 

use of the declining balance method. 

When the change is made, the adjusted 

depreciable basis of the MACRS 

property as of the beginning of the 

taxable year is recovered through annual 

depreciation allowances over the 

remaining recovery period (for further 

guidance, see section 6.06 of Rev. Proc. 


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87–57 (1987–2 C.B. 687) and 

§ 601.601(d)(2)(ii)(b) of this chapter). 

(ii) Depreciation method changes for 

section 167 property. For a depreciable 

or amortizable asset for which 

depreciation is determined under 

section 167 (other than under section 

168, section 1400I, section 1400L(c), 

former section 168, or an additional first 

year depreciation deduction provision 

of the Internal Revenue Code (for 

example, section 168(k), 1400L(b), or 

1400N(d))), see § 1.167(e)–1(b), (c), and 

(d) for the changes in depreciation 

method that are permitted to be made 

without the consent of the 

Commissioner. For CLADR property, see 

§ 1.167(a)–11(c)(1)(iii) for the changes in 

depreciation method for CLADR 

property that are permitted to be made 

without the consent of the 

Commissioner. Further, see § 1.167(a)–

11(b)(4)(iii)(c) for how to correct an 

incorrect classification or 

characterization of CLADR property. 

(iii) Section 481 adjustment. Except as 

otherwise expressly provided by the 

Internal Revenue Code, the regulations 

under the Internal Revenue Code, or 

other guidance published in the Internal 

Revenue Bulletin, no section 481 

adjustment is required or permitted for 

a change from one permissible method 

of computing depreciation or 

amortization to another permissible 

method of computing depreciation or 

amortization for an asset because this 

change is implemented by either a cutoff method (for further guidance, for 

example, see section 2.06 of Rev. Proc. 

97–27 (1997–1 C.B. 680), section 2.06 of 

Rev. Proc. 2002–9 (2002–1 C.B. 327), 

and § 601.601(d)(2)(ii)(b) of this chapter) 

or a modified cut-off method (under 

which the adjusted depreciable basis of 

the asset as of the beginning of the year 

of change is recovered using the new 

permissible method of accounting), as 

appropriate. However, a change from an 

impermissible method of computing 

depreciation or amortization to a 

permissible method of computing 

depreciation or amortization for an asset 

results in a section 481 adjustment. 

Similarly, a change in the treatment of 

an asset from nondepreciable or 

nonamortizable to depreciable or 

amortizable (or vice versa) or a change 

in the treatment of an asset from 

expensing to depreciating (or vice versa) 

results in a section 481 adjustment. 

(iv) Change in useful life. This 

paragraph (e)(2)(ii)(d)(5)(iv) applies to 

an adjustment in the useful life of a 

depreciable or amortizable asset for 

which depreciation is determined under 

section 167 (other than under section 

168, section 1400I, section 1400L(c), 

former section 168, or an additional first 

year depreciation deduction provision 

of the Internal Revenue Code (for 

example, section 168(k), 1400L(b), or 

1400N(d))) and that is not a change in 

method of accounting under paragraph 

(e)(2)(ii)(d) of this section. For this 

adjustment in useful life, no section 481 

adjustment is required or permitted. The 

adjustment in useful life, whether 

initiated by the Internal Revenue 

Service (IRS) or a taxpayer, is corrected 

by adjustments in the taxable year in 

which the conditions known to exist at 

the end of that taxable year changed 

thereby resulting in a redetermination of 

the useful life under § 1.167(a)–1(b) (or 

if the period of limitation for assessment 

under section 6501(a) has expired for 

that taxable year, in the first succeeding 

taxable year open under the period of 

limitation for assessment), and in 

subsequent taxable years. In other 

situations (for example, the useful life is 

incorrectly determined in the placed-inservice year), the adjustment in the 

useful life, whether initiated by the IRS 

or a taxpayer, may be corrected by 

adjustments in the earliest taxable year 

open under the period of limitation for 

assessment under section 6501(a) or the 

earliest taxable year under examination 

by the IRS but in no event earlier than 

the placed-in-service year of the asset, 

and in subsequent taxable years. 

However, if a taxpayer initiates the 

correction in useful life, in lieu of filing 

amended Federal tax returns (for 

example, because the conditions known 

to exist at the end of a prior taxable year 

changed thereby resulting in a 

redetermination of the useful life under 

§ 1.167(a)–1(b)), the taxpayer may 

correct the adjustment in useful life by 

adjustments in the current and 

subsequent taxable years. 

(v) Change in placed-in-service date. 

This paragraph (e)(2)(ii)(d)(5)(v) applies 

to a change in the placed-in-service date 

of a depreciable or amortizable asset 

that is not a change in method of 

accounting under paragraph (e)(2)(ii)(d) 

of this section. For this change in 

placed-in-service date, no section 481 

adjustment is required or permitted. The 

change in placed-in-service date, 

whether initiated by the IRS or a 

taxpayer, may be corrected by 

adjustments in the earliest taxable year 

open under the period of limitation for 

assessment under section 6501(a) or the 

earliest taxable year under examination 

by the IRS but in no event earlier than 

the placed-in-service year of the asset, 

and in subsequent taxable years. 

However, if a taxpayer initiates the 

change in placed-in-service date, in lieu 

of filing amended Federal tax returns, 

the taxpayer may correct the placed-inservice date by adjustments in the 

current and subsequent taxable years. 

(iii) Examples. The rules of this 

paragraph (e) are illustrated by the 

following examples: 

Example 1. Although the sale of 

merchandise is an income producing factor, 

and therefore inventories are required, a 

taxpayer in the retail jewelry business reports 

his income on the cash receipts and 

disbursements method of accounting. A 

change from the cash receipts and 

disbursements method of accounting to the 

accrual method of accounting is a change in 

the overall plan of accounting and thus is a 

change in method of accounting. 

Example 2. A taxpayer in the wholesale 

dry goods business computes its income and 

expenses on the accrual method of 

accounting and files its Federal income tax 

returns on such basis except for real estate 

taxes which have been reported on the cash 

receipts and disbursements method of 

accounting. A change in the treatment of real 

estate taxes from the cash receipts and 

disbursements method to the accrual method 

is a change in method of accounting because 

such change is a change in the treatment of 

a material item within his overall accounting 

practice. 

Example 3. A taxpayer in the wholesale 

dry goods business computes its income and 

expenses on the accrual method of 

accounting and files its Federal income tax 

returns on such basis. Vacation pay has been 

deducted in the year in which paid because 

the taxpayer did not have a completely 

vested vacation pay plan, and, therefore, the 

liability for payment did not accrue until that 

year. Subsequently, the taxpayer adopts a 

completely vested vacation pay plan that 

changes its year for accruing the deduction 

from the year in which payment is made to 

the year in which the liability to make the 

payment now arises. The change for the year 

of deduction of the vacation pay plan is not 

a change in method of accounting but results, 

instead, because the underlying facts (that is, 

the type of vacation pay plan) have changed. 

Example 4. From 1968 through 1970, a 

taxpayer has fairly allocated indirect 

overhead costs to the value of inventories on 

a fixed percentage of direct costs. If the ratio 

of indirect overhead costs to direct costs 

increases in 1971, a change in the underlying 

facts has occurred. Accordingly, an increase 

in the percentage in 1971 to fairly reflect the 

increase in the relative level of indirect 

overhead costs is not a change in method of 

accounting but is a change in treatment 

resulting from a change in the underlying 

facts. 

Example 5. A taxpayer values inventories 

at cost. A change in the basis for valuation 

of inventories from cost to the lower of cost 

or market is a change in an overall practice 

of valuing items in inventory. The change, 

therefore, is a change in method of 

accounting for inventories. 

Example 6. A taxpayer in the 

manufacturing business has for many taxable 

years valued its inventories at cost. However, 

cost has been improperly computed since no 

overhead costs have been included in valuing 


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the inventories at cost. The failure to allocate 

an appropriate portion of overhead to the 

value of inventories is contrary to the 

requirement of the Internal Revenue Code 

and the regulations under the Internal 

Revenue Code. A change requiring 

appropriate allocation of overhead is a 

change in method of accounting because it 

involves a change in the treatment of a 

material item used in the overall practice of 

identifying or valuing items in inventory. 

Example 7. A taxpayer has for many 

taxable years valued certain inventories by a 

method which provides for deducting 20 

percent of the cost of the inventory items in 

determining the final inventory valuation. 

The 20 percent adjustment is taken as a 

‘‘reserve for price changes.’’ Although this 

method is not a proper method of valuing 

inventories under the Internal Revenue Code 

or the regulations under the Internal Revenue 

Code, it involves the treatment of a material 

item used in the overall practice of valuing 

inventory. A change in such practice or 

procedure is a change of method of 

accounting for inventories. 

Example 8. A taxpayer has always used a 

base stock system of accounting for 

inventories. Under this system a constant 

price is applied to an assumed constant 

normal quantity of goods in stock. The base 

stock system is an overall plan of accounting 

for inventories which is not recognized as a 

proper method of accounting for inventories 

under the regulations. A change in this 

practice is, nevertheless, a change of method 

of accounting for inventories. 

Example 9. In 2003, A1, a calendar year 

taxpayer engaged in the trade or business of 

manufacturing knitted goods, purchased and 

placed in service a building and its 

components at a total cost of $10,000,000 for 

use in its manufacturing operations. A1 

classified the $10,000,000 as nonresidential 

real property under section 168(e). A1 

elected not to deduct the additional first year 

depreciation provided by section 168(k) on 

its 2003 Federal tax return. As a result, on 

its 2003, 2004, and 2005 Federal tax returns, 

A1 depreciated the $10,000,000 under the 

general depreciation system of section 168(a), 

using the straight line method of 

depreciation, a 39-year recovery period, and 

the mid-month convention. In 2006, A1 

completes a cost segregation study on the 

building and its components and identifies 

items that cost a total of $1,500,000 as section 

1245 property. As a result, the $1,500,000 

should have been classified in 2003 as 5-year 

property under section 168(e) and 

depreciated on A1’s 2003, 2004, and 2005 

Federal tax returns under the general 

depreciation system, using the 200-percent 

declining balance method of depreciation, a 

5-year recovery period, and the half-year 

convention. Pursuant to paragraph 

(e)(2)(ii)(d)(2)(i) of this section, A1’s change 

to this depreciation method, recovery period, 

and convention is a change in method of 

accounting. This method change results in a 

section 481 adjustment. The useful life 

exception under paragraph (e)(2)(ii)(d)(3)(i) 

of this section does not apply because the 

assets are depreciated under section 168. 

Example 10. In 2003, B, a calendar year 

taxpayer, purchased and placed in service 

new equipment at a total cost of $1,000,000 

for use in its plant located outside the United 

States. The equipment is 15-year property 

under section 168(e) with a class life of 20 

years. The equipment is required to be 

depreciated under the alternative 

depreciation system of section 168(g). 

However, B incorrectly depreciated the 

equipment under the general depreciation 

system of section 168(a), using the 150- 

percent declining balance method, a 15-year 

recovery period, and the half-year 

convention. In 2010, the IRS examines B’s 

2007 Federal income tax return and changes 

the depreciation of the equipment to the 

alternative depreciation system, using the 

straight line method of depreciation, a 20- 

year recovery period, and the half-year 

convention. Pursuant to paragraph 

(e)(2)(ii)(d)(2)(i) of this section, this change in 

depreciation method and recovery period 

made by the IRS is a change in method of 

accounting. This method change results in a 

section 481 adjustment. The useful life 

exception under paragraph (e)(2)(ii)(d)(3)(i) 

of this section does not apply because the 

assets are depreciated under section 168. 

Example 11. In May 2003, C, a calendar 

year taxpayer, purchased and placed in 

service equipment for use in its trade or 

business. C never held this equipment for 

sale. However, C incorrectly treated the 

equipment as inventory on its 2003 and 2004 

Federal tax returns. In 2005, C realizes that 

the equipment should have been treated as a 

depreciable asset. Pursuant to paragraph 

(e)(2)(ii)(d)(2) of this section, C’s change in 

the treatment of the equipment from 

inventory to a depreciable asset is a change 

in method of accounting. This method 

change results in a section 481 adjustment. 

Example 12. Since 2003, D, a calendar year 

taxpayer, has used the distribution fee period 

method to amortize distributor commissions 

and, under that method, established pools to 

account for the distributor commissions (for 

further guidance, see Rev. Proc. 2000–38 

(2000–2 C.B. 310) and § 601.601(d)(2)(ii)(b) of 

this chapter). A change in the accounting of 

distributor commissions under the 

distribution fee period method from pooling 

to single asset accounting is a change in 

method of accounting pursuant to paragraph 

(e)(2)(ii)(d)(2)(vi) of this section. This method 

change results in no section 481 adjustment 

because the change is from one permissible 

method to another permissible method. 

Example 13. Since 2003, E, a calendar year 

taxpayer, has accounted for items of MACRS 

property that are mass assets in pools. Each 

pool includes only the mass assets that are 

placed in service by E in the same taxable 

year. E is able to identify the cost basis of 

each asset in each pool. None of the pools are 

general asset accounts under section 168(i)(4) 

and the regulations under section 168(i)(4). E 

identified any dispositions of these mass 

assets by specific identification. Because of 

changes in E’s recordkeeping in 2006, it is 

impracticable for E to continue to identify 

disposed mass assets using specific 

identification. As a result, E wants to change 

to a first-in, first-out method under which the 

mass assets disposed of in a taxable year are 

deemed to be from the pool with the earliest 

placed-in-service year in existence as of the 

beginning of the taxable year of each 

disposition. Pursuant to paragraph 

(e)(2)(ii)(d)(2)(vii) of this section, this change 

is a change in method of accounting. This 

method change results in no section 481 

adjustment because the change is from one 

permissible method to another permissible 

method. 

Example 14. In August 2003, F, a calendar 

year taxpayer, purchased and placed in 

service a copier for use in its trade or 

business. F incorrectly classified the copier 

as 7-year property under section 168(e). F 

elected not to deduct the additional first year 

depreciation provided by section 168(k) on 

its 2003 Federal tax return. As a result, on 

its 2003 and 2004 Federal tax returns, F 

depreciated the copier under the general 

depreciation system of section 168(a), using 

the 200-percent declining balance method of 

depreciation, a 7-year recovery period, and 

the half-year convention. In 2005, F realizes 

that the copier is 5-year property and should 

have been depreciated on its 2003 and 2004 

Federal tax returns under the general 

depreciation system using a 5-year recovery 

period rather than a 7-year recovery period. 

Pursuant to paragraph (e)(2)(ii)(d)(2)(i) of this 

section, F’s change in recovery period from 

7 to 5 years is a change in method of 

accounting. This method change results in a 

section 481 adjustment. The useful life 

exception under paragraph (e)(2)(ii)(d)(3)(i) 

of this section does not apply because the 

copier is depreciated under section 168. 

Example 15. In 2004, G, a calendar year 

taxpayer, purchased and placed in service an 

intangible asset that is not an amortizable 

section 197 intangible and that is not 

described in section 167(f). G amortized the 

cost of the intangible asset under section 

167(a) using the straight line method of 

depreciation and a determinable useful life of 

13 years. The safe harbor useful life of 15 or 

25 years under § 1.167(a)–3(b) does not apply 

to the intangible asset. In 2008, because of 

changing conditions, G changes the 

remaining useful life of the intangible asset 

to 2 years. Pursuant to paragraph 

(e)(2)(ii)(d)(3)(i) of this section, G’s change in 

useful life is not a change in method of 

accounting because the intangible asset is 

depreciated under section 167 and G is not 

changing to or from a useful life that is 

specifically assigned by the Internal Revenue 

Code, the regulations under the Internal 

Revenue Code, or other guidance published 

in the Internal Revenue Bulletin. 

Example 16. In July 2003, H, a calendar 

year taxpayer, purchased and placed in 

service ‘‘off-the-shelf’’ computer software and 

a new computer. The cost of the new 

computer and computer software are 

separately stated. H incorrectly included the 

cost of this software as part of the cost of the 

computer, which is 5-year property under 

section 168(e). On its 2003 Federal tax return, 

H elected to depreciate its 5-year property 

placed in service in 2003 under the 

alternative depreciation system of section 

168(g) and H elected not to deduct the 

additional first year depreciation provided by 

section 168(k). The class life for a computer 

is 5 years. As a result, because H included 

the cost of the computer software as part of 

the cost of the computer hardware, H 


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depreciated the cost of the software under the 

alternative depreciation system, using the 

straight line method of depreciation, a 5-year 

recovery period, and the half-year 

convention. In 2005, H realizes that the cost 

of the software should have been amortized 

under section 167(f)(1), using the straight line 

method of depreciation, a 36-month useful 

life, and a monthly convention. H’s change 

from 5-years to 36-months is a change in 

method of accounting because H is changing 

to a useful life that is specifically assigned by 

section 167(f)(1). The change in convention 

from the half-year to the monthly convention 

also is a change in method of accounting. 

Both changes result in a section 481 

adjustment. 

Example 17. On May 1, 2003, I2, a calendar 

year taxpayer, purchased and placed in 

service new equipment at a total cost of 

$500,000 for use in its business. The 

equipment is 5-year property under section 

168(e) with a class life of 9 years and is 

qualified property under section 168(k)(2). I2 

did not place in service any other depreciable 

property in 2003. Section 168(g)(1)(A) 

through (D) do not apply to the equipment. 

I2 intended to elect the alternative 

depreciation system under section 168(g) for 

5-year property placed in service in 2003. 

However, I2 did not make the election. 

Instead, I2 deducted on its 2003 Federal tax 

return the 30-percent additional first year 

depreciation attributable to the equipment 

and, on its 2003 and 2004 Federal tax 

returns, depreciated the remaining adjusted 

depreciable basis of the equipment under the 

general depreciation system under 168(a), 

using the 200-percent declining balance 

method, a 5-year recovery period, and the 

half-year convention. In 2005, I2 realizes its 

failure to make the alternative depreciation 

system election in 2003 and files a Form 

3115, ‘‘Application for Change in Accounting 

Method,’’ to change its method of 

depreciating the remaining adjusted 

depreciable basis of the 2003 equipment to 

the alternative depreciation system. Because 

this equipment is not required to be 

depreciated under the alternative 

depreciation system, I2 is attempting to make 

an election under section 168(g)(7). However, 

this election must be made in the taxable 

year in which the equipment is placed in 

service (2003) and, consequently, I2 is 

attempting to make a late election under 

section 168(g)(7). Accordingly, I2’s change to 

the alternative depreciation system is not a 

change in accounting method pursuant to 

paragraph (e)(2)(ii)(d)(3)(iii) of this section. 

Instead, I2 must submit a request for a private 

letter ruling under § 301.9100–3 of this 

chapter, requesting an extension of time to 

make the alternative depreciation system 

election on its 2003 Federal tax return. 

Example 18. On December 1, 2004, J, a 

calendar year taxpayer, purchased and 

placed in service 20 previously-owned 

adding machines. For the 2004 taxable year, 

J incorrectly classified the adding machines 

as items in its ‘‘suspense’’ account for 

financial and tax accounting purposes. Assets 

in this suspense account are not depreciated 

until reclassified to a depreciable fixed asset 

account. In January 2006, J realizes that the 

cost of the adding machines is still in the 

suspense account and reclassifies such cost 

to the appropriate depreciable fixed asset 

account. As a result, on its 2004 and 2005 

Federal tax returns, J did not depreciate the 

cost of the adding machines. Pursuant to 

paragraph (e)(2)(ii)(d)(2) of this section, J’s 

change in the treatment of the adding 

machines from nondepreciable assets to 

depreciable assets is a change in method of 

accounting. The placed-in-service date 

exception under paragraph (e)(2)(ii)(d)(3)(v) 

of this section does not apply because the 

adding machines were incorrectly classified 

in a nondepreciable suspense account. This 

method change results in a section 481 

adjustment. 

Example 19. In December 2003, K, a 

calendar year taxpayer, purchased and 

placed in service equipment for use in its 

trade or business. However, K did not receive 

the invoice for this equipment until January 

2004. As a result, K classified the equipment 

on its fixed asset records as being placed in 

service in January 2004. On its 2004 and 

2005 Federal tax returns, K depreciated the 

cost of the equipment. In 2006, K realizes 

that the equipment was actually placed in 

service during the 2003 taxable year and, 

therefore, depreciation should have began in 

the 2003 taxable year instead of the 2004 

taxable year. Pursuant to paragraph 

(e)(2)(ii)(d)(3)(v) of this section, K’s change in 

the placed-in-service date of the equipment 

is not a change in method of accounting. 

* * * * * 

(4) Effective date—(i) In general. 

Except as provided in paragraphs 

(e)(3)(iii) and (e)(4)(ii) of this section, 

paragraph (e) of this section applies on 

or after December 30, 2003. For the 

applicability of regulations before 

December 30, 2003, see § 1.446–1(e) in 

effect prior to December 30, 2003 

(§ 1.446–1(e) as contained in 26 CFR 

part 1 edition revised as of April 1, 

2003). 

(ii) Changes involving depreciable or 

amortizable assets. With respect to 

paragraph (e)(2)(ii)(d) of this section, 

paragraph (e)(2)(iii) Examples 9 through 

19 of this section, and the language 

‘‘certain changes in computing 

depreciation or amortization (see 

paragraph (e)(2)(ii)(d) of this section)’’

in the last sentence of paragraph 

(e)(2)(ii)(a) of this section—

(A) For any change in depreciation or 

amortization that is a change in method 

of accounting, this section applies to 

such a change in method of accounting 

made by a taxpayer for a depreciable or 

amortizable asset placed in service by 

the taxpayer in a taxable year ending on 

or after December 30, 2003; and 

(B) For any change in depreciation or 

amortization that is not a change in 

method of accounting, this section 

applies to such a change made by a 

taxpayer for a depreciable or 

amortizable asset placed in service by 

the taxpayer in a taxable year ending on 

or after December 30, 2003. 

§ 1.446–1T [Removed] 

■ Par. 7. Section 1.446–1T is removed. 

■ Par. 8. Section 1.1016–3 is amended 

by revising paragraphs (h) and (j) to read 

as follows: 

§ 1.1016–3 Exhaustion, wear and tear, 

obsolescence, amortization, and depletion 

for periods since February 28, 1913. 

* * * * * 

(h) Application to a change in method 

of accounting. For purposes of 

determining whether a change in 

depreciation or amortization for 

property subject to section 167, 168, 

197, 1400I, 1400L(c), to section 168 

prior to its amendment by the Tax 

Reform Act of 1986 (100 Stat. 2121) 

(former section 168), or to an additional 

first year depreciation deduction 

provision of the Internal Revenue Code 

(for example, section 168(k), 1400L(b), 

or 1400N(d)) is a change in method of 

accounting under section 446(e) and the 

regulations under section 446(e), section 

1016(a)(2) does not permanently affect a 

taxpayer’s lifetime income. 

* * * * * 

(j) Effective date—(1) In general. 

Except as provided in paragraph (j)(2) of 

this section, this section applies on or 

after December 30, 2003. For the 

applicability of regulations before 

December 30, 2003, see § 1.1016–3 in 

effect prior to December 30, 2003 

(§ 1.1016–3 as contained in 26 CFR part 

1 edition revised as of April 1, 2003). 

(2) Depreciation or amortization 

changes. Paragraph (h) of this section 

applies to a change in depreciation or 

amortization for property subject to 

section 167, 168, 197, 1400I, 1400L(c), 

to former section 168, or to an 

additional first year depreciation 

deduction provision of the Internal 

Revenue Code (for example, section 

168(k), 1400L(b), or 1400N(d)) for 

taxable years ending on or after 

December 30, 2003. 

§ 1.1016–3T [Removed] 

■ Par. 9. Section 1.1016–3T is removed. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 21, 2006. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 06–9892 Filed 12–22–06; 8:45 am] 

BILLING CODE 4830–01–P 


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