Rev. Proc. 2015-20: Simplified Accounting Method Changes

An IRS Revenue Procedure is a formal statement that provides guidance to taxpayers on how to comply with tax law. The IRS offers simplified paths for certain small businesses to get automatic consent for changing an improper accounting method. This guidance lessens the administrative work for small businesses, which may find the standard process for changing an accounting method to be a significant undertaking, and helps them align their practices with regulations.

Qualifying for the Simplified Procedure

To use a simplified procedure, a taxpayer must be a “small business taxpayer.” This definition is met if a business’s average annual gross receipts for the three preceding tax years are below a certain threshold, which is adjusted for inflation and is $31 million for 2025.

The procedure is specifically designed for changes from an impermissible accounting method to a permissible one for the same item. An impermissible method is one that is incorrect under tax law. For example, if a business incorrectly capitalized routine repair costs instead of expensing them, this procedure allows a change to the correct method of deducting those costs in the year they are incurred.

Certain limitations prevent the use of these simplified methods. A business currently under an IRS examination for any tax year generally cannot use an automatic change procedure without specific consent from the examining agent. The procedures are also not available for certain types of changes, such as a change from the cash method to an accrual method of accounting for some taxpayers.

Calculating the Section 481(a) Adjustment

When a business changes an accounting method, a Section 481(a) adjustment is often required. This calculation acts as a catch-up mechanism to ensure no income or expenses are duplicated or missed because of the switch from the old method to the new one. The adjustment captures the cumulative financial difference between the two methods up to the beginning of the year of change.

The adjustment can be either positive or negative. A positive adjustment increases taxable income, which occurs when the change in method results in recognizing income that was previously deferred. Conversely, a negative adjustment decreases taxable income by accelerating deductions that should have been taken in prior years.

For example, consider a business that incorrectly capitalized $20,000 of supply costs. Under a correct accounting method, these costs should have been expensed as incurred. Changing to the proper method entitles the business to deduct the full $20,000, resulting in a negative Section 481(a) adjustment that reduces its taxable income.

For a voluntary method change, a negative Section 481(a) adjustment is taken in its entirety in the tax year of the change. A positive adjustment, however, is generally spread out over four years to lessen the immediate tax impact.

Implementing the Change on Your Tax Return

To receive automatic IRS consent, a business must file Form 3115, Application for Change in Accounting Method, with its timely filed federal income tax return for the year of the change. The “automatic” nature of this procedure means advance permission from the IRS is not required.

Form 3115 requires the taxpayer’s name and identification number, a description of the item being changed, and details of both the old and new methods. The form must also report the calculated Section 481(a) adjustment.

The Section 481(a) adjustment is reported on the tax return for the year of change as an item of income or deduction. For instance, a negative adjustment is reported as a deduction, which reduces the overall taxable income for that year.