How To Make Accounting Method Change
Are you thinking about changing the accounting method for your company? Using the right accounting method could potentially save you thousands of dollars on your taxes. The whole purpose of using financial statements is to give external parties relevant and accurate information to make investment decisions. If your current accounting method can no longer provides you with a fair and complete financial picture, it is time to change your accounting method.
There are two common way to record financial data: cash and accrual method. When you first file a tax return, your company has the option to choose the accounting method; after that, your company will need approval from the IRS to switch accounting methods by using form 3115.
Is your company eligible to switch accounting methods?
Most companies can choose the type of accounting method they want to use; however, the following entities cannot use the cash method:
A corporation (other than an S-Corporation) with average annual gross receipts exceeding $5 million
A partnership with a corporation (other than an S-Corporation) as a partner and with the partnership having average annual gross receipts exceeding $5 million
A tax shelter
A business with inventory is not as straightforward to evaluate the assets they own. According to the IRS, a business with inventory must use the accrual method.
Do the type of changes you want to make require IRS approval?
1) The following changes are examples of types of changes that require IRS approval:
A change from the cash method to the accrual method, or vice versa
A change in the method or basis used to value inventory
A change in the method of figuring depreciation (except certain permitted changes to the straight-line method for property placed in service before 1981)
2) The following are not changes in accounting methods and do NOT require IRS approval:
A correction of a math or posting error
A correction of an error in figuring tax liability (such as an error in figuring a credit)
An adjustment of any item of income or deduction that does not involve the proper time for including it in income or deducting it
An adjustment in the useful life of a depreciable asset
A note to keep in mind: the IRS won’t offer any automatic approval for a company that is under examination or is connected to a company under examination. It does not cost anything to file form 3115.
These are all the facts and tips you need to know while switching accounting methods! May the Force be with you!
