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How to Change the Accounting Method for Taxes

If you own a business, you must designate an accounting method when filing your first business income tax return. Most businesses choose either an accrual or a cash basis accounting method. The IRS, though, does allow modified methods that combine the two primary accounting types in some cases. The accrual accounting method records transactions regardless of when a company makes or receives payments. Cash accounting, on the other hand, only records transactions for which the company already received or made a payment. Companies can apply to the IRS and request a change to the primary accounting method used when calculating taxes.

Instructions

    1

    Navigate to the IRS website. Download and save IRS Form 3115 to your computer. You will need Adobe Acrobat Reader or another compatible program to open the PDF file.

    2

    Open IRS Form 3115 on your computer. In the top section of the form, enter general information about your business, such as the company name, address, Employment Identification Number (EIN), type of business entity and beginning and ending start dates for the tax years affected by the change in accounting method. Also, enter a company contact name and telephone number in case the IRS needs to contact someone about the change request.

    3

    Answer the questions in the other four parts of the form (Parts I through IV) truthfully and as thoroughly as possible. Part I of the form deals with automatic requests for changes in accounting methods. Part II contains general questions about the reasons for the accounting method change. Part III allows companies to make advanced requests for changing accounting methods in a future tax year.

    4

    Complete Part IV of the form to adjust transactions under Section 481(a). Section 481(a) adjustments are for transactions duplicated or omitted because of the change in accounting methods. For instance, if a company changes from cash accounting to the accrual method at the end of 2010 then in January of 2011, the company pays an expense related to the 2010 tax year, the company cannot claim the expense as a deduction under the accrual method in 2011. This type of expense adjustment is allowable on Form 3115 under the Section 481(a) rule. Otherwise, the change in accounting would prevent the company from claiming a legitimate business deduction.

    5

    Date and sign Form 3115 on page 1. If another person filled out the form for you, have this individual also date and sign the document.

    6

    Mail the form to the appropriate address listed in the Form 3115 instruction booklet.


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