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of accounting, do not include any amounts attributable to a

Part IV—Section 481(a) Adjustment

special method of accounting (as described in section

14.12(2)(b) of the Appendix of Rev. Proc. 2008-52 — automatic

Line 24. Ordinarily, an adjustment under section 481(a) is

change number 127).

required for changes in method of accounting. However, for

certain changes in method of accounting, the taxpayer must

Line 1b. Enter amounts received or reported as income in a

make the change on a cut-off basis. In those cases, there is no

prior year that were not earned as of the beginning of the year

section 481(a) adjustment.

of change. For example, an advance payment received in a

If the accounting method change is an automatic accounting

prior year for goods that were not delivered by the beginning of

method change in functional currency under section 985 (see

the year of change may be reported upon delivery if the

section 29.01 of the Appendix to Rev. Proc. 2008-52), the

taxpayer qualifies under Regulations section 1.451-5. If any

adjustments required under Regulations section 1.985-5 must

amounts entered on line 1b are for advance payments,

be made on the last day of the taxable year ending before the

complete Schedule B.

year of change. Any gain or loss that is not required to be

Line 1h. Enter the net amount, which is the net section 481(a)

recognized under Regulations section 1.985-5 is not subject to

adjustment, on line 1h. Also, enter the net section 481(a)

section 481. Attach a schedule showing the adjustment

adjustment on page 3, Part IV, line 25.

required under Regulations section 1.985-5. The schedule

The following example illustrates how an applicant calculates

should include the amount of the adjustment required pursuant

the section 481(a) adjustment when changing to an accrual

to Regulations section 1.985-5, a summary of the computation

method, a nonaccrual-experience method, and the recurring

of such adjustment, and an explanation of any other

item exception.

adjustments required by Regulations section 1.985-5.

Example. ABC Corporation, a calendar year taxpayer using

Line 25. Attach a schedule showing the section 481(a)

the cash method of accounting, has the following items of

adjustment for each change in method of accounting for each

unreported income and expense on December 31, 2008.

applicant included in the Form 3115. If the applicant is a CFC or

10/50 corporation, and if its functional currency is not the U.S.

Accrued income . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$250,000

dollar, the section 481(a) adjustment must be stated in that

functional currency. This schedule may be combined with the

Uncollectible amounts based on

information requested on the fourth line on page 1 (list of

the nonaccrual-experience method . . . . . . . . . . . . .

50,000

applicants and their identification numbers) and on line 23 (user

Accrued amounts properly

fee). Include a summary of the computation of the section

deductible (economic performance has occurred) . . . .

75,000

481(a) adjustment and an explanation of the methodology used

to determine it. If the section 481(a) adjustment is based on

Expenses eligible for recurring item

more than one component of the accounting method being

exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,000

changed, include a summary of the computation for each

ABC Corporation changes to an overall accrual method, a

component. The summary of the computation and explanation

nonaccrual-experience method, and the recurring item

of the section 481(a) adjustment does not need to be extensive

exception for calendar year 2009. The section 481(a)

but should be sufficient to demonstrate that the section 481(a)

adjustment is calculated as of January 1, 2009, as follows.

adjustment is being computed correctly.

Accrued income . . . . . . . . . . . . . . . .

$250,000

Example. Under its present method, XYZ Corporation is

deducting certain costs that are required to be capitalized into

Less:

inventory under section 263A. XYZ Corporation is proposing to

Uncollectible amount . . . . . . . . . . . .

50,000

change its method of accounting to properly capitalize such

costs. The computation of the section 481(a) adjustment with

Net income accrued but not received . .

$200,000

respect to the change in method of accounting may be

Less:

demonstrated as follows:

Accrued expenses . . . . . . . . . . . . . .

75,000

Beginning inventory for year of change under

Expenses deducted as recurring item

5,000

proposed method . . . . . . . . . . . . . . . . . . . . . . .

$120,000

Total expenses accrued but not paid . .

80,000

Beginning inventory for year of change under

present method . . . . . . . . . . . . . . . . . . . . . . . .

100,000

Section 481(a) adjustment . . . . . . . .

$120,000

Difference (positive section 481(a) adjustment) . . . . .

+$ 20,000

Line 2. If an applicant is requesting to use the recurring item

Line 26. See section 7.03(1) of Rev. Proc. 97-27, as modified

exception (section 461(h)(3)), the section 481(a) adjustment

by Rev. Proc. 2002-19, or section 5.04(3)(a) of Rev. Proc.

must include the amount of the additional deduction that results

2008-52, as applicable.

from using the recurring item exception.

Schedule A—Change in Overall Method

Part II—Change to the Cash Method For

Advance Consent Request

of Accounting

Limits on cash method use. Except as provided below, C

Part I—Change in Overall Method

corporations and partnerships with a C corporation as a partner

All applicants filing to change their overall method of accounting

may not use the cash method of accounting. Tax shelters, also,

are precluded from using the cash method. For this purpose, a

must complete Schedule A, Part I, including applicants filing

under designated automatic accounting method change

trust subject to tax on unrelated business income under section

numbers 32, 33, 34, 122, 123, 126, 127, and 128 in the List of

511(b) is treated as a C corporation with respect to its unrelated

Automatic Accounting Method Changes. See the list beginning

trade or business activities.

on page 9.

The limit on the use of the cash method under section 448

Lines 1a through 1g. Enter the amounts requested on lines

does not apply to:

1a through 1g, even though the calculation of some amounts

1. Farming businesses as defined in section 448(d)(1).

may not have been required in determining taxable income due

2. Qualified personal service corporations as defined in

to the applicant’s present method of accounting.

section 448(d)(2).

Note: Do not include amounts that are not attributable to the

3. C corporations and partnerships with a C corporation as

change in method of accounting, such as amounts that correct

a partner if the corporation or partnership has gross receipts of

a math or posting error or errors in calculating tax liability. In

$5 million or less. See section 448(b)(3) and (c) to determine if

addition, for a bank changing to an overall cash/hybrid method

the applicant qualifies for this exception.

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Instructions For Form 3115 - Application For Change In Accounting Method - Internal Revenue Service - 2009 Page 7

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