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Parts II and III, as applicable. This change does not fall under

43. Timing of incurring real property taxes, personal

the procedures of Rev. Proc. 2008-52 (but see section 14.04 in

property taxes, state income taxes, and state franchise

the Appendix of Rev. Proc. 2008-52.) Instead, see Regulations

taxes (section 461) — for a qualifying applicant, to treating

section 1.448-1. (Also see automatic method change 123.)

these taxes as incurred in the tax year in which the taxes are

paid, or to account for these taxes under the recurring item

35. Nonaccrual-experience method (section 448) — for an

exception to the economic performance rules, or to revoke the

applicant changing: to a safe harbor method provided in section

ratable accrual election under section 461(c). See section 19.02

1.448-2(f)(1) (the revenue-based moving average method),

in the Appendix of Rev. Proc. 2008-52.

(f)(2) (the actual experience method), (f)(3) (the modified Black

44. Timing of incurring workers’ compensation act, tort,

Motor method), (f)(4) (the modified moving average method), of

breach of contract, or violation of law liabilities (section

(f)(5) (the alternative nonaccrual-experience method); to a

461) — for a qualifying applicant accounting for self-insured

periodic system; from a NAE method to a specific charge-off

liabilities arising under any workers’ compensation act or out of

method; from a sub-method of its current NAE method

any tort, breach of contract, or violation of law, to treating the

provided in section 1.448-2 regarding applicable periods to

liability as incurred in the tax year in which (a) all the events

another sub-method regarding applicable periods that is

have occurred establishing the fact of the liability, (b) the

permitted under section 1.448-2, other than a change to

amount of the liability can be determined with reasonable

exclude tax years from an applicable period under section

accuracy, and (c) payment is made to the person to which the

1.448-2(d)(6); or, from a sub-method of its current NAE method

liability is owed. See section 19.03 in the Appendix of Rev.

provided in section 1.448-2 regarding tracing of recoveries to

Proc. 2008-52, as amplified and clarified by Rev. Proc.

another sub-method regarding tracing of recoveries permitted

2009-39.

under section 1.448-2(f)(2)(iii). See section 14.04 in the

45. Timing of incurring certain payroll tax liabilities

Appendix of Rev. Proc. 2008-52.

(section 461) — for FICA and FUTA taxes, state unemployment

36. Interest accrual on non-performing loans (section

taxes, and railroad retirement taxes, to the method under which

451) — for an accrual method bank accounting for qualified

the applicant may deduct in Year 1 its otherwise deductible

stated interest on non-performing loans, to the method whereby

FICA and FUTA taxes, state unemployment taxes, and railroad

interest is accrued until either the loan is worthless under

retirement taxes imposed with respect to year-end wages

section 166 and is charged off as a bad debt or the interest is

properly accrued in Year 1, but paid in Year 2, if the

determined to be uncollectible. See section 15.01 in the

requirements of the recurring item exception are met; or, for

Appendix of Rev. Proc. 2008-52.

state unemployment taxes and railroad retirement taxes, to the

37. Advance rentals (section 451) — for advance rentals

method stated above where the applicant already uses that

other than advance rentals subject to section 467, to inclusion

method of accounting for FICA and FUTA taxes; or for FICA

in gross income in the tax year received. See section 15.02 in

and FUTA taxes to the safe harbor method provided in Rev.

the Appendix of Rev. Proc. 2008 – 52.

Proc. 2008-25, 2008-13 I.R.B. 686. See section 19.04 in the

38. State or local income or franchise tax refunds

Appendix of Rev. Proc. 2008-52.

(section 451) — for an accrual method applicant with state or

46. Cooperative advertising (section 461) — to incurring a

local income or franchise tax refunds, to accrue these items in

liability in the tax year in which these services are performed,

the tax year the applicant receives payments or notice of

provided the manufacturer is able to reasonably estimate this

approval of its refund claim (whichever is earlier), according to

liability even though the retailer does not submit the required

Rev. Rul. 2003-3, 2003-1 C.B. 252. See section 15.03 in the

claim form until the following year. See section 19.05 in the

Appendix of Rev. Proc. 2008-52.

39. Capital cost reduction (CCR) payments (section

47. Distributor commissions (section 263) — from

451) — for CCR payments (as defined in Rev. Proc. 2002-36,

deducting distributor commissions to capitalizing and

2002-1 C.B. 993) made by vehicle lessees, to the method that

amortizing distributor commissions using the distribution fee

excludes these payments from the applicant’s gross income

period method, the 5-year method, or the useful life method.

and from the applicant’s bases in the purchased vehicles. See

Complete Schedule E of Form 3115. See section 10.04 in the

section 15.04 in the Appendix of Rev. Proc. 2008-52.

Appendix of Rev. Proc. 2008-52.

40. Exclusion for certain returned magazines,

48. Cash discounts (section 471) — for cash discounts

paperbacks, or records (section 458) — for an accrual

granted for timely payment, when such discounts approximate a

method applicant electing to exclude from gross income some

fair interest rate, from a method of consistently including the

or all of the income attributable to qualified sales during the tax

price of the goods before discount in the cost of the goods and

year of magazines, paperbacks, or records that are returned

including in gross income any discounts taken to a method of

before the close of the applicable merchandise return period for

reducing the cost of the goods by the cash discounts and

that tax year. The applicant’s Form 3115 need contain only the

deducting as an expense any discounts not taken, or vice

information listed in Regulations section 1.458-2(d). This

versa. Complete Schedule D, Parts II and III, of Form 3115, as

election does not fall under the procedures of Rev. Proc.

applicable. See section 21.01 in the Appendix of Rev. Proc.

2008-52. Instead, see Regulations section 1.458-2.

2008-52, as clarified by Rev. Proc. 2009-39.

41. Percentage-of-completion (section 460) — for an

49. Estimating inventory shrinkage (section 471) — from

applicant not required by section 460 to use the

the present method of estimating inventory shrinkage in

percentage-of-completion method to account for its long-term

computing ending inventory to the retail safe harbor method in

contracts, from an exempt-contract method properly applied to

section 4 of Rev. Proc. 98-29, 1998-15 I.R.B. 22, or to a

the percentage-of-completion method. Complete Schedule D,

method other than the retail safe harbor method, provided

Parts I and III, of Form 3115. See section 18.01 in the Appendix

(a) the applicant’s present method of accounting does not

of Rev. Proc. 2008-52.

estimate inventory shrinkage and (b) the applicant’s new

42. Timing of incurring employee medical benefits

method of accounting (that estimates inventory shrinkage)

clearly reflects income under section 446(b). Complete

liabilities (section 461) — for an applicant with an obligation to

pay an employee’s medical expenses (including medical

Schedule D, Parts II and III, of Form 3115, as applicable. See

expenses for retirees and employees who filed claims under a

section 21.02 in the Appendix of Rev. Proc. 2008-52.

workers’ compensation act) that is neither insured nor paid from

50. Small taxpayer ($1 million) inventory exception

a welfare benefit fund, to treatment as a liability incurred in the

(section 471) — for a qualifying applicant with average annual

tax year in which the applicant’s employee files the claim with

gross receipts of $1,000,000 or less (see Rev. Proc. 2001-10,

the applicant; or, if the applicant has a liability to pay a third

2001-1 C.B. 272), from the present method of accounting for

party for medical services to its employees, to treatment as a

inventoriable items (including, if applicable, the method of

liability as incurred in the tax year in which the services are

capitalizing costs under section 263A) to treating inventoriable

provided. See section 19.01(1) in the Appendix of Rev. Proc.

items in the same manner as materials and supplies that are

2008-52, as amplified and clarified by Rev. Proc. 2009-39.

not incidental under Regulations section 1.162-3. Complete

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Instructions For Form 3115 - Application For Change In Accounting Method - Internal Revenue Service - 2009 Page 11

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