Is switching from MACRS to ADS generally considered a change in accounting method for tax purposes?
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Switching from MACRS (Modified Accelerated Cost Recovery System) to ADS (Alternative Depreciation System) is generally considered a change in the depreciation method and/or recovery period for a depreciable asset. Under the tax rules, such a change is typically treated as a change in method of accounting, which generally requires the consent of the Commissioner (usually via filing Form 3115), unless a specific exception applies.
1. Legal Framework
a) Definition of a Change in Method of Accounting
- Treasury Regulation § 1.446-1(e)(2)(ii)(d) states that a change in the depreciation or amortization method, period of recovery, or convention of a depreciable or amortizable asset is a change in method of accounting. This includes a switch from one permissible method (e.g., MACRS) to another (e.g., ADS), or a change in the recovery period assigned to the asset.
b) Exceptions: Change in Use
- However, there is a key exception: a change in the method of computing depreciation or amortization 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. For example, if property becomes subject to ADS because it is now used predominantly outside the United States, or becomes tax-exempt use property, the change in depreciation method and/or recovery period is not treated as a change in method of accounting for which consent is required. Instead, the change is implemented prospectively, starting in the year of the change in use.
c) General Rule for Voluntary Changes
- If a taxpayer voluntarily elects to switch from MACRS to ADS (for example, by making an election under IRC § 168(g)(7)), this is a change in method of accounting and requires the Commissioner's consent.
d) Involuntary or Statutorily Required Changes
- If the switch to ADS is required by law (e.g., the property becomes tax-exempt use property under IRC § 168(h), or is used predominantly outside the U.S.), the change is not a change in method of accounting, but rather a change in use, and is implemented prospectively without the need for consent.
e) Case Law and IRS Guidance
- The IRS Chief Counsel Advice and case law confirm that a change in depreciation method or recovery period for a depreciable asset is a change in method of accounting, unless it is due to a change in use as described above.
- In Brookshire Brothers Holdings Inc. v. Commissioner, the court held that a reclassification of property for MACRS purposes (e.g., from 39-year to 15-year property) was not a change in accounting method requiring consent, because it was analogous to a change in useful life, which is excepted from the consent requirement.
2. Summary Table
3. Practical Application
- If you are switching from MACRS to ADS because the property now meets a statutory requirement (e.g., it is now tax-exempt use property or is used predominantly outside the U.S.), this is not a change in method of accounting and does not require consent.
- If you are making a voluntary election to switch from MACRS to ADS, or correcting an error in the original method, this is a change in method of accounting and requires the Commissioner's consent.
4. Supporting Authority
- Treas. Reg. § 1.446-1(e)(2)(ii)(d): Change in depreciation method, period of recovery, or convention is a change in method of accounting.
- Treas. Reg. § 1.446-1(e)(2)(ii)(d)(3)(ii): Change in use of an asset is not a change in method of accounting.
- Treas. Reg. § 1.168(i)-4(d): Provides rules for changes in use and how depreciation is computed prospectively.
- IRS CCA 201436048: Confirms that a change in depreciation method or period of recovery is a change in method of accounting, unless it is due to a change in use.
- Brookshire Brothers Holdings Inc. v. Commissioner: Reclassification of property for MACRS purposes is not a change in method of accounting if it is analogous to a change in useful life.
Conclusion: Switching from MACRS to ADS is generally a change in method of accounting requiring consent, unless the switch is due to a change in use of the property as defined in the regulations, in which case it is not a change in method of accounting and does not require consent.
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