Automatic Accounting Method Changes Under Rev. Proc. 2000-46

The Internal Revenue Service (IRS) provides procedures for taxpayers to change their method of accounting. For businesses that hold inventory for resale or produce property, the uniform capitalization (UNICAP) rules under Internal Revenue Code Section 263A require capitalizing certain direct and indirect costs. Current guidance offers a streamlined, automatic consent route for certain permissible changes, allowing taxpayers to switch from an improper method to a proper one without waiting for explicit IRS approval. These automatic change procedures are detailed in a list that is updated periodically by the IRS.

Determining Eligibility for the Procedure

A primary exemption from the UNICAP rules is available for certain small business taxpayers, such as resellers and producers, who meet a specific gross receipts test. For a tax year beginning in 2025, a business is exempt if its average annual gross receipts for the three preceding tax years do not exceed $31 million. This threshold is adjusted periodically for inflation. If the average is at or below this amount, the business is not required to apply UNICAP rules and can use an automatic procedure to change its accounting method.

Other categories of taxpayers may also be eligible for an automatic change. A “formerly small reseller” is a business that previously qualified for the small reseller exception but has since exceeded the gross receipts threshold, making it subject to UNICAP for the first time. A “reseller-producer” is a business that both acquires property for resale and produces property, and these taxpayers must carefully evaluate their facts to determine if an automatic change is available.

Permissible Accounting Method Changes

Once eligibility is confirmed, a taxpayer must identify if their specific change is permitted under the automatic procedures. Revenue Procedure 2025-23 provides the current list of designated automatic changes. These procedures allow a taxpayer to change from an impermissible method of accounting for UNICAP costs, such as failing to capitalize a required cost, to a permissible one.

For resellers and reseller-producers, a common automatic change involves adopting a simplified method for capitalizing costs. The Simplified Resale Method, for example, allows a reseller to determine the additional costs to capitalize to inventory by applying a formula. This formula uses a ratio of the taxpayer’s storage, purchasing, and handling costs to their total purchases, avoiding a more burdensome analysis.

Procedural updates can remove certain changes from the automatic list. For instance, changing to or from the step-allocation method now requires filing under nonautomatic procedures, which involves a user fee and specific IRS consent. Taxpayers must consult the current list of designated automatic changes to ensure their intended “from” and “to” methods qualify for the streamlined process.

Required Information and Calculations

A taxpayer must calculate a Section 481 adjustment, which represents the cumulative financial impact of the accounting method change. Calculated as of the first day of the year of change, it prevents the duplication or omission of income or deductions. The adjustment quantifies the difference between income reported under the old method and what would have been reported had the new method always been in use.

To calculate the adjustment, a taxpayer revalues the prior year’s ending inventory using the new accounting method. The difference between this revalued inventory and the original value is the Section 481 adjustment. For example, if the new method increases capitalized costs, the revalued inventory will be higher, creating a positive adjustment that reflects previously deferred income.

The adjustment’s treatment on the tax return depends on whether it is positive or negative. A negative Section 481 adjustment, which decreases taxable income, is deducted in full in the year of the change. A positive adjustment, which increases taxable income, is spread ratably over four tax years, starting with the year of change. If a positive adjustment is less than $50,000, the taxpayer can elect to recognize the full amount in the year of change.

Filing for the Automatic Change

The final step is to file for the automatic change using Form 3115, Application for Change in Accounting Method. For an automatic change, filing the form itself effectuates the change, provided all rules are followed. The filing process has two distinct parts that must be completed correctly.

First, the taxpayer must attach the original, unsigned Form 3115 to its timely filed federal income tax return for the year of the change. This includes filing by the extended due date if the taxpayer has a valid extension.

Second, a separate, signed copy of the same Form 3115 must be filed with the IRS national office. This duplicate copy must be sent to the address specified in the form’s instructions. This copy must be filed no earlier than the first day of the year of change and no later than the date the original Form 3115 is filed with the tax return.