The IRS has granted automatic consent to taxpayers (Rev. Proc. 2014-33) to change their accounting methods for sales-based royalties and sales-based vendor chargebacks. The changes reflect final regulations issued in January 2014 (TD 9652). By granting automatic consent, the IRS is providing audit protection for prior years to taxpayers who change their accounting methods, even if they were using an incorrect method.
Sales-based royalties are royalties paid to secure the contractual right to use a trademark or similar right associated with the resale of property. The royalties are due on the sale of the property.
The IRS requires that the royalties be capitalized to property available for resale. However, taxpayers can allocate the royalties entirely to property sold, rather than to inventory on hand. This provides taxpayers with the greatest reduction in income. Rev. Proc. 2014-33 also permits taxpayers to use a simplified method to allocate royalty costs entirely to the cost of goods sold (COGS).
Sales-based vendor chargebacks are a discount or rebate provided to a seller for selling a vendor’s merchandise to specific customers at the vendor’s price. The IRS requires that the vendor chargeback reduce the COGS. This is unfavorable to taxpayers; discounts that reduce COGS increase the seller’s income.
The IRS permitted two automatic changes: one allows a taxpayer to exclude the chargebacks from the formula used to allocate capitalized costs to ending inventory under a simplified method; the other applies to a taxpayer who will treat chargebacks as a reduction in COGS.
Scope limitations (such as being under audit) that would prevent a taxpayer from changing its accounting method will not apply for two years, for any of the changes permitted by Rev. Proc. 2014-33. Taxpayers may submit only one Form 3115, even if they are making more than one automatic change.
While the automatic consent procedures apply to tax years ending on or after January 13, 2014, taxpayers who applied before May 6, 2014 for advance consent may instead make their changes automatically and get a refund of their user fee.
For more information on these changes, please contact your Brown Smith Wallace Tax Advisor, or Rob Haggerty, at 314.983.1311 or firstname.lastname@example.org.