Calendar-year taxpayers that have not yet filed their 2015 federal income tax return may still implement automatic accounting method changes for 2015 by filing Form 3115 by September 15, 2016.
Benefits of filing a voluntary method change may include tax savings that are essentially permanent in nature, audit protection for prior open tax years and administrative cost savings obtained through use of simplified methods and elections. Because the accounting method change procedures significantly limit the availability of audit protection benefits for taxpayers under exam, taxpayers filing method changes primarily to obtain audit protection should file Form 3115 as soon as possible while they are either not under exam or while they are under exam and qualify for one of the exceptions under section 8.02(1) of Rev. Proc. 2015-13, such as the three-month window period currently open for many calendar-year taxpayers (see our earlier insight “Upcoming ‘three-month window’ for accounting method changes”).
Many taxpayers may not be aware that the IRS has in recent years expanded the list of accounting methods qualifying for “automatic” change to include many of the most common tax accounting method changes (such as those listed below). See also Rev. Proc. 2016-29 which contains many more automatic changes and is conveniently sorted by Internal Revenue Code Section number.
Common automatic method changes
- Cash to accrual overall method
- Advance payments (e.g., gift cards, services, subscriptions, etc.)
- Accrued bonus liability
- Accrued self-insured medical and dental expenses (IBNR)
- Prepaid payment liabilities (“12 month rule” for insurance, taxes, certain licenses and warranty liabilities)
- Accrued professional fees on “executory” service or insurance contracts
- Accrued rent (section 467 rent agreements)
- Accrued rebates and allowances liabilities
- Inventory (certain LIFO, UNICAP and inventory write-down and reserve changes)
- Depreciation changes (e.g., impermissible to permissible methods, including missed bonus depreciation)
- Repairs and maintenance
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.