Recordkeeping Under the Alternative Cost Method

• May 8, 2023
• Brian Duren

In two previous posts, we discussed tax deduction strategies and detailed application the Alternative Cost Method (ACM), newly revised by the IRS in Rev. Proc. 2023-9. In this final installment, we review the recordkeeping requirements which must be followed when adopting this method.

The computations of ACM allocations are complex and evolve during the years of a real estate development, and taxpayers will need sound books and records to establish compliance with the method. Traditional cost accounting records used in preparation of financial statements and income tax returns will generally capture revenues and costs as they occur but are not well-suited to documenting the changes in estimated future costs.

Estimates of future common improvement costs to be incurred must be identified and documented each year, along with records substantiating the allocation to the benefitted parcels within the development project. These should be maintained in addition to the traditional records of project costs incurred. Future cost amounts will require annual documentation of the process for determining the estimates for each reporting period, as well as documentation supporting the contractual obligations of the taxpayer to perform the common improvement expenditures.

Taxpayers will need to retain these records throughout, and for at least three years beyond, the end of the project. While this is inconvenient, it is much less administratively burdensome than the prior guidance which required detailed annual reporting to the IRS of costs and cost allocations, as well as extending the statutes of limitations for all years during which the development took place. Thus, taxpayers that opted out of the prior Rev. Proc. 92-29 method should revisit the new method now that many of the reporting formalities have been relaxed.

Taxpayers who had previously elected to apply the predecessor rules of Rev. Proc. 92-29 must re-elect under the new guidance. These taxpayers re-electing under Rev. Proc. 2023-9 are likely to be able to use similar calculations in determining the effect of a change in accounting method, but they might also find additional common improvement costs, or improved allocation methodologies, to consider. Whatever a taxpayer’s new approach to the calculation, catch-up adjustments would be permitted under Sec. 481(a), so a full evaluation of the opportunities available under the new method would be wise.

Taxpayers are encouraged to begin planning now for the new ACM by evaluating the means to maximize the benefits of this method in their real estate development projects and start documenting the records needed to support this method for future use.

Our series on the ACM was developed with the support of Perry McGowan – thank you, Perry, for your contributions in bringing this thought leadership to the industry!

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