About Form 3115, Application for Change in Accounting Method Internal Revenue Service

What distinguishes this from simple automation is the integration of predictive analytics that generate client-specific insights on profitability trends, working capital optimization, and growth opportunities. This implementation can allow the firm to serve more clients with improved transaction processing efficiency while increasing revenue through advisory services. For accounts payable, the solution can extract invoice data, match it to purchase orders and receiving documents, flag discrepancies, and route it for approval based on client-specific rules.

Effective Date

The permanent extension of the look-through rules offers companies greater certainty in their planning and accounting processes. This extension allows businesses to forecast and strategize more effectively by maintaining predictable treatment of certain types of income between related CFCs. However, a company may have chosen to consider the effect of BEAT on realizability of its deferred tax assets. A company that has elected to consider the impact of BEAT in assessing the realizability of its deferred tax assets will need to consider the impact of the changes to the BEAT calculation on its valuation allowance assessments and account for any impacts at enactment. BEAT is imposed when the tax calculated under BEAT exceeds the corporation’s regular tax liability determined after the application of certain credits allowed against the regular tax. BEAT is measured based on modified taxable income (i.e., taxable income after adding back base erosion payments).

• Generally, more information needs to be provided on Form 3115 for a non-automatic accounting method change, and the complexity of the issue and the taxpayer’s facts may increase the time needed to gather data and prepare the application.
• Over time, a company’s circumstances can evolve, prompting a need to reconsider its established accounting practices.
• The regulations under Sec. 446 provide that certain categories of items are not accounting method changes.

Many of you may recall how broadly potential tax accounting method changes were discussed a decade ago related to repair and capitalization regulations. Additionally, in our last issues Issues of Interest, we briefly touched on the topic of accounting method changes due to a new method for bad debt deductions for banks. Today, we delve deeper into this important subject to give some background ahead of a potential need for accounting method changes resulting from expected tax reform/extensions coming in 2025. When implementing accounting changes, one of the most important considerations is whether to apply the change retrospectively or prospectively. This decision can significantly influence how financial information is presented and interpreted, affecting stakeholders’ perceptions and decisions. Retrospective application involves revising prior financial statements as if the new accounting method had always been in place.

IRS updates the list of automatic method changes

It also includes a change in the treatment of any “material item,” which is an item that affects the timing of when income is reported or an expense is taken. The defining characteristic of such a change is its effect on timing, not the permanent alteration of lifetime taxable income. It is the framework used to track financial activity and is established when a company files its first tax return. Businesses may choose from several permissible methods, such as the cash or accrual basis, depending on their structure.

Preparing Form 3115 and Calculating the Adjustment

During a complex business entity exam, accounting methods may be an area of focus — as they are the foundation upon which a business taxpayer calculates taxable income. This item provides a high–level discussion of the potential issues and procedures related to an accounting method change during an exam, either when filed by a taxpayer or when imposed as an involuntary change. As a result of accounting methods changes the mismatch between the old and new methods, some items may be treated in inconsistent ways under the old and new accounting methods, which could distort the lifetime income of the taxpayer. For example, a taxpayer switching from cash to accrual would establish an accounts payable on the first day of the year of change for its expenses incurred on credit.

A Quick Guide for Accounting Method Change

The cognitive component can learn continuously from reviewer actions, refining how it identifies issues and suggests corrections. Beyond saving time, this can improve internal control documentation, reduce audit preparation time, and help the finance team deliver more timely insights to business leaders. CPA firms can implement an IPA system to improve their audit risk assessment and planning process. The system can analyze the client’s industry, financial performance, and control environment against a vast database of historical audit outcomes.

The enduring importance of determining tax ownership

The system can recognize changes in tax law and client circumstances, suggesting adjustments accordingly. For complex scenarios, the IPA presents the CPA with alternative treatment options and their implications. Clients and employers today expect their accountants to provide real-time insights, proactive guidance, and strategic partnership (either with the client or, in the case of corporate CPAs, company management). IPA can help CPAs meet these expectations by handling routine processes autonomously, freeing professionals to deliver more sophisticated analysis.

Other provisions

• A  change of accounting method includes a change in the overall plan of accounting for income and deductions; or a change in the treatment of any material item used in the overall accounting plan.
• However, it can create challenges in comparing financial results across different periods, as the basis for measurement may have shifted.
• The first three items fall under “accounting changes” while the latter falls under “accounting error.”
• The guide addresses key considerations while allowing businesses to customize components based on their specific objectives, operational requirements, and resource constraints.
• Grant Thornton Advisors LLC may use resources from its subsidiaries and domestic and/or international affiliates during the course of providing professional services to its clients.
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The guidance presents opportunities for taxpayers to consider depreciation-method changes to provide immediate tax benefits if a favorable (i.e., a negative Sec. 481(a)) adjustment results, or to avoid audit exposure when an unfavorable adjustment results. Depreciation changes due to posting or mathematical errors or changes in underlying facts are not accounting-method changes. Another change in accounting method we see often relates to ensuring that accrued bonuses are deducted in the correct period. More information on when to deduct an accrued bonus can be found in the accrued bonus section of this article. From a risk management perspective, IPA offers significant advantages in compliance and quality control. Automated processes follow consistent protocols, reducing the likelihood of human error in calculations or regulatory filings.

AICPA Tax Section

This transition is not merely beneficial but increasingly essential for practice sustainability in an evolving marketplace. For instance, an IPA system might analyze historical audit findings, current regulatory guidance, and client-specific risk factors to suggest appropriate testing approaches for an audit engagement — a level of assistance that far exceeds what RPA can provide. This capability to support professional judgment represents a fundamental shift in how automation technologies can serve accounting professionals. Companies should determine which election they expect to take (expensing versus capitalizing and amortizing) and consider whether any related deferred taxes should be recorded. In addition, companies should assess any related impact of their election on realizability of their deferred tax assets (both those that may be generated from their US R&D election as well as other deferred tax assets that could be impacted by the election).

These DCNs simplify the process of identifying and reporting the specific accounting method change being requested on Form 3115. This content provides information and comments on current issues and developments from Grant Thornton Advisors LLC and Grant Thornton LLP. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC and Grant Thornton LLP. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content. For additional information on topics covered in this content, contact a Grant Thornton professional. Grant Thornton LLP and Grant Thornton Advisors LLC (and their respective subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards.

For routine filings, the system can prepare draft returns, reconcile data sources, and identify potential audit triggers before submission. Changes in accounting estimates, while not requiring restatement of prior periods, can still significantly impact financial statements. For example, revising the estimated useful life of a major asset can alter depreciation expense, thereby affecting net income and asset values on the balance sheet. Similarly, adjustments to bad debt provisions can influence accounts receivable and overall financial health indicators. These changes necessitate clear and comprehensive disclosures to help stakeholders understand the reasons behind the adjustments and their potential future implications. Finally, taxpayers should be aware of whether the accounting method for an item is an “issue under consideration”for the tax years under exam.