The IRS permits companies to maintain and disclose financial data using either the accrual-based system or the cash accounting method. Business owners can also use both accounting systems concurrently. There is a lot of freedom here, although there is one caveat. You must continue to use whichever method you pick when you first notify the IRS that you have opted to monitor and report that way throughout the first year of your business’s existence.
The IRS revised its list of accounting method modifications on 08/13/2021, to which automatic change procedures apply on or after August 12, 2021.
The latest revenue procedure Rev. Proc. 2021-34 also updates Rev. Proc. 2015-13 to establish procedures for a taxpayer to get automatic IRS approval to modify its way of accounting to comply with Regs. Section 1.451-3 and/or Regs. Section 1.451-8, as appropriate, by providing regulations of cost offsetting method modifications. Along with Rev. Proc. 2015-13, there is a change in Rev. Proc. 2019-43 related to procedures as per Section 446 and Regs. Section 1.446-1 to derive automatic IRS consent to amend accounting methods to comply with the modified regulations under Regs. Sec. 1.451-3, 1.451-8, as well as 1.275-2. It shall also modify the accounting methods for certain inventory costs to ensure compliance with certain Secs. 263A, 461, and 471. The change in inventory cost shall be allowed when such changes are in connection with the changes made to comply with Regs. Sec. 1.451-3 and/or Regs. Sec. 1.451-8, as required.
It’s not precisely as engraved in stone as it sounds. You can contact the IRS ahead of time and request authorization to alter accounting techniques. As long as you do so, you would not face any issues. But, failing to submit the request may result in IRS fines.
How to change the accounting methods?
If you want to revise your accounting method after establishing it and filing your first business tax return, you must file an updated Form 3115. It makes no real difference whether you wish to modify your whole accounting system or simply the accounting treatment of a specific item.
Switching from a cash basis method to an accrual basis method or switching from an accrual basis method to a cash basis approach—requires IRS clearance. To modify the technique or foundation used to value your inventory, you must also obtain official approval from the IRS.
The latest modifications address a wide range of issues, including some uniform capitalization (UNICAP) techniques, a shift in general accounting method from cash to accrual, income recognition timings, the timing of incurring inventory expenses, and many more.
Depreciation mistakes are often addressed by filing an updated tax return or requesting a change in accounting method. If an improper depreciation method has been recorded for at least two years in a row, a change in accounting technique is necessary to remedy such mistakes.
Adjustments to your depreciation or amortization techniques typically require approval, although some changes to the straight-line approach are permissible without specific authorization from the IRS. Since the regulations are intricate, speak with a corporate tax specialist if you are still unsure whether your scenario satisfies this special exemption.
What is Form 3115?
Form 3115 is known as the “Application for Change in Accounting Method.” It is intended for an automated transition in any accounting method. A form 3115 is used to modify an entity’s general accounting system or the accounting treatment of any item, such as converting to the accrual method or speeding depreciation, expensing a previously capitalized item under 263(a), or changing inventory reporting.
When to file Form 3115
Numerous columns on the first page of the form include the DCN. DCN is an abbreviation for Designated Change Number. If there is a DCN for the specified modification, it is an automatic change. One can obtain a database of Designated Change Number at www.irs.gov/pub/irs-pdf/i3115.pdf
Suppose a specific change does not have a Designated Change Number. In that case, the modification is non-automatic, and the taxpayer must petition the IRS (and pay $11,000) to get authorization to make the change. You can file form 3115 after authorization gets granted. Upon receiving a Form 3115 submitted under the non-automatic change, the IRS typically provides an acknowledgment of receipt within sixty days. The limit for filing a non-automatic modification is the completion of the current tax year.
How to file Form 3115?
In most cases, the applicant is the person who files Form 3115. The petitioner is an organization, an individual, or a separate and distinct trade or business of an entity or a person whose accounting system is being modified. The common parent of a consolidated group can apply itself and any group member. One can include identical modifications for two or more of the following in a single Form 3115 in any combination.
- Members of a unified group.
- Q-Subs and SMLLCs are two separate and different crafts or companies.
- A partnership that is controlled entirely by a consolidated group
In general, a filer who fails to file a timely 3115 will not be given an extension unless there are exceptional and compelling reasons. If a 3115 is submitted on the applicant’s behalf, submit the filer’s name along with the identification number on the first line. Likewise, the applicant’s name and identification number are on the fourth line.
In the case of a partnership, list the names of the partnership on the first line. One among the general partners or LLC members who has firsthand knowledge of the facts and has authorization rights is required to sign in the signature area. The filer must submit Form 3115 (automatic change) in duplicate. Append the original 3115 to the filer’s promptly filed (with extensions) return for the year of modification. The initial 3115 attachment does not have to be signed.
Then, send a signed copy of Form 3115 to the IRS in Ogden, UT. It should be sent no sooner than the first day of the year of change and no longer than the day the original is filed with the federal income tax return for the year of change.
Temporary use of e-signatures for Form 3115
To safeguard the health of taxpayers and tax professionals, the Internal Revenue Service stated today that digital signatures would get permitted on certain forms that you cannot file online until December 31, 2021. The move will assist in decreasing in-person interaction and lower the danger to taxpayers and tax professionals during the COVID-19 epidemic, allowing both groups to work remotely to complete forms on time.
IRS.gov and tax professional software programs provide access to forms. These forms are often printed and mailed since they cannot be e-filed. The IRS has not said which digital signature product tax professionals must use. There are several commercially available items.
No worries since Form 3115- Application for Change in Accounting Method is among them.
Resolve your confusion regarding Form 3115 and its amendments with Smart Accountants!
The tax filing season is typically stressful for both individual taxpayers and businesses. Most firms fail to understand that devoting enough time to tax preparation aids in record organization and reduces the chance of mistakes. Compliances regarding the change in accounting methods and its implications become manageable with veteran support like that of CPAs and EAs.
SMART ACCOUNTANTS offers customized accounting and tax preparation services for all types of entities. Our staff rigorously adheres to the most exemplary tactics for your business, allowing you to profit from larger refunds and lower tax responsibilities. We possess an experienced and well-trained team of professionals that have carved out a niche in the field of taxation and whose knowledge is unrivaled.
Smart Accountants specializes in painstakingly analyzing your balance sheets and interpreting and classifying each item on them to complete tax returns in a timely and accurate way. Call us right now!!!