Starting Your Business/Keeping Tax Records

Accounting Periods and Methods
Changes in Accounting Method

Change in Accounting Method. You can generally choose any permitted accounting method when you file your first tax return. You do not need IRS approval to choose the method. It must be used consistently from year to year and clearly show your income. See Accounting Methods.

A change in your accounting method includes a change not only in your overall system of accounting but also in the treatment of any material item. Although an accounting method can exist without treating an item the same all the time, an accounting method is not established for an item, in most cases, unless the item is treated the same every time.

Changing Your Business' Method Of Accounting

Automatic Consent. You may be able to change your business' method of accounting with the IRS's automatic consent and receive the benefits of a voluntary change in method of accounting. If your business qualifies for automatic consent, you make the change without paying any user fee and without waiting for a letter ruling.

Rev. Proc. 99-49, IRB 1999-52, describes 41 types of changes in method of accounting that you can make for your business with the IRS's automatic consent, if your business qualifies. For example, if you are currently using the cash receipts and disbursements (cash) method of accounting for your business you may be able to change to the accrual method using the automatic consent procedures in Rev. Proc. 99-49, even if the cash method is not a proper method for your business. The other 40 types of changes are described in the Appendix of Rev. Proc. 99-49.

Additional types of changes in method of accounting that you may be able to make for your business with the IRS's automatic consent are described in Rev. Proc. 98-58, 1998-49 I.R.B. 19; Rev. Proc. 97-43, 1997-2 C.B. 494; Rev. Proc. 92-67, 1992-2 C.B. 429; Rev. Proc. 92-29, 1992-1 C.B. 748; and Rev. Proc. 91- 51, 1991-2 C.B. 779.

Non-Automatic Consent. If you want to change your business' method of accounting, but cannot use one of the IRS's automatic consent revenue procedures, you may be eligible to request the change under the non-automatic provisions of Rev. Proc. 97-27, 1997-1 C.B. 680. You must file your request under Rev. Proc. 97-27 during the tax year you want to change to the new method. Also, you must pay a user fee with your request under Rev. Proc. 97- 27. The user fee for requests filed under Rev. Proc. 97-27 currently is $500 for business related tax issues for business' with gross income of less than $1 million, and, generally, $1,200 otherwise. When your request is approved, you will receive a letter ruling containing the IRS's consent for your change. You must have this letter to use the new method of accounting on your return.

IRS Form. Ordinarily, you will need to file Form 3115, Application for Change in Accounting Method, to change your business' method of accounting under an automatic consent revenue procedure or to request a change under the non-automatic provisions of Rev. Proc. 97-27.

Benefits. When you voluntarily change your business' method of accounting from one that is improper to one that is proper under either the automatic or the non-automatic consent procedures, you generally receive the following benefits for your business:

• a current year of change to the proper method (no amended returns for prior years);
• no interest or otherwise applicable penalty for the benefits your business received from the past use of that improper method;
• a four year spread of any adjustment required under section 481(a) of the Code (to convert your old method to the new proper method); and
• protection from the IRS requiring your business to change from that improper method for an earlier period.

Important: Due to the complex nature of applying for a change in accounting method, you may want to seek the advice of a professional before applying for a change.

IRS Approval for Change in Accounting Method

Important References:

Publication 538    Accounting Periods and Methods
Form 3115            Application for Change in Accounting Method