accounting methods changes 7

The Intricacies of Tax Accounting Method Changes and Form 3115

Changing an accounting method involves adopting a new way of reporting income, expenses, and other financial transactions. There are various reasons why a taxpayer might want to change their accounting method, such as complying with new tax laws or regulations, improving the accuracy of financial reporting, or aligning their accounting practices with their business operations. Our tax professionals can guide your business through accounting method changes, Section 174 compliance, and year-end tax strategies to increase deductions and defer income. As a corporation or pass-through entity, you may have opportunities to improve your federal income tax position and, in turn, enhance your cash tax savings by strategically adopting or changing tax accounting methods. For a non-automatic change, the original, signed Form 3115 must be filed with the IRS national office during the tax year for which the change is requested. A copy of that same application must then be attached to the federal income tax return for that year when it is filed.

Step 3: Provide general information

A positive adjustment is spread over a period of four tax years, beginning with the year of the change, to lessen the immediate tax impact. Identifying a change involves evaluating material items, irrespective of their dollar value. A material accounting methods changes item, irrespective of its dollar value, is determined by the timing of inclusion or deduction.

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• Modified cash-basis accounting is a hybrid method that incorporates elements of both cash and accrual accounting.
• In contrast to some adjustments made for non—accounting method items, adjustments made under exam for accounting method items may have ramifications for tax years beyond the year under exam.
• Accounting changes require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of the change.
• CPA firms that offer tax services can deploy an IPA solution that refines their tax preparation process.
• For example, when examining accounts receivable, the IPA solution can match invoices to shipping documents and payments, flag aging discrepancies, and even generate confirmation requests.
• Companies will need to evaluate the conformity rules for each state to determine the state tax effect and relevant tax accounting.

Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended. \r\n \r\n The information contained herein is general in nature and is based on authorities that are subject to change. \r\n \r\n Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.

In addition, a separate, signed copy of the Form 3115 must be filed with the IRS National Office. When a business adopts a new accounting method, it must calculate the cumulative effect of the change on its taxable income as of the beginning of the year of change. This adjustment, known as a Section 481(a) adjustment, can either increase or decrease taxable income. If the adjustment results in an increase in taxable income, the taxpayer typically may spread the adjustment over four years to mitigate the immediate tax impact. Conversely, if the adjustment decreases taxable income, the taxpayer can recognize the entire benefit in the year of change.

Rev. Proc. 2025-23: Updated annual list of automatic accounting method changes

To meet standards and assure data quality, human intervention is needed to evaluate the appropriateness of previous audit data and ensure the accuracy of data the algorithm will learn from. Based on this assessment, the IPA solution can recommend specific audit procedures, sample sizes, and specialist involvement tailored to the client’s risk profile. As audit evidence is gathered, the system will continuously update its risk assessment and suggest modifications to the audit approach. The integration of generative AI within the IPA framework further distinguishes it from previous automation approaches. Whereas traditional automation executes existing processes, IPA with generative capabilities can help design new processes, draft professional communications, generate analytical frameworks, and create documentation templates tailored to specific client situations.

Understanding Opening Entries in Modern Financial Reporting

• Effective planning anticipates potential challenges, aligns IPA initiatives closely with strategic objectives, and ensures adequate resource allocation.
• However, the legislation increases the Section 48D advanced manufacturing investment credit rate from 25% to 35%, effective for property placed in service after December 31, 2025.
• The third accounting change is a change in financial statements, which in effect, result in a different reporting entity.
• And any positive Sec. 481(a) adjustment from the current change must take it in full (no offset with the prior year’s negative Sec. 481(a) adjustment) in computing taxable income for the year of change.
• Catch-up depreciation is an adjustment on Form 3115 to correct accumulated depreciation when changing accounting methods, ensuring total depreciation is accurately reflected.

In addition to determining whether an issue involves an accounting method, taxpayers looking to make an accounting method change should be aware of the timing and scope of any ongoing IRS exam. Sec. 446(a) provides that taxable income shall be computed under a method of accounting generally selected by the taxpayer that would include not only the overall accounting method but also the treatment of any item. 2015–13 notes that if an item does not permanently change overall income or expense but does or could change the specific tax year(s) in which the item is taken into account, then it involves timing and may be an accounting method. In addition, accounting methods generally involve consistent treatment across several years.

Often companies carry inventory that is obsolete, unsalable, damaged, defective, or no longer needed. While for financial reporting inventory is generally reduced by reserves, for tax purposes a business normally must dispose of inventories to recognize a loss, unless an exception applies. Thus, a recommended approach for tax purposes to accelerate losses related to inventory is to dispose of or scrap the inventory by year end. Sellers must choose to transfer all or a part of an eligible credit on the seller’s original return for the taxable year for which the credit is decided by the due date of that return (including extensions), but not earlier than February 13, 2023. To substantiate an abandonment loss, some act is needed to show a taxpayer’s intent to permanently discard or stop the use of an asset in its business.

The IPA solution can also conduct scenario planning by simulating the financial impact of potential business decisions or economic changes. During review meetings, finance leaders can modify assumptions in real time and immediately see the cascading effects across financial statements. Many of the OBBB changes to IRA credits do not go into effect until after 2025 and are unlikely to have a financial statement impact at enactment.

This may include details about prior changes in accounting methods or any related transactions. The form itself requires detailed information about the taxpayer, the current accounting method, the proposed accounting method, and the reason for the change. It also requires a description of the adjustment that needs to be made to properly account for the change in the taxpayer’s tax liability. For eligible property placed in service during 2024, the applicable bonus percentage is 60%. A change in the bonus plan would be considered a change in underlying facts, which would allow the taxpayer to prospectively adopt a new method of accounting without filing a Form 3115.

Understanding Automatic Accounting Method Changes: An Overview of Rev. Proc. 2025-23

If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. The information contained herein is general in nature and is based on authorities that are subject to change. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information.

Deferred revenue: Transactional triggering events

If a desired accounting method change is not included on the automatic change list, the taxpayer must request permission through the non-automatic consent procedure. This process, also known as requesting advance consent, involves a formal application to the IRS national office, payment of a user fee, and a detailed review by the IRS before approval is granted. A change in accounting method is a change in the taxpayer’s overall plan for recognizing gross income or deductions.

This guide provides a quick reference for the process of changing accounting methods, encompassing IRS consent, Form 3115 submission, and key considerations. Accounting changes and error correction refers to guidance on reflecting accounting changes and errors in financial statements. It may involve correction of incorrect class lives or implementation of the results of a cost segregation study.