Rev Proc 2015-40: Automatic Accounting Method Changes

The Internal Revenue Service (IRS) provides guidance that allows certain taxpayers to change their method of accounting with automatic consent. This process simplifies what can otherwise be a formal application requiring specific IRS approval. These procedures streamline the transition between different accounting methods for eligible businesses, reducing administrative burdens. The list of automatic accounting method changes is provided in Rev. Proc. 2024-23, while Rev. Proc. 2015-13 outlines the general procedures for making the change.

This framework is beneficial for small businesses, which were the focus of legislative changes that expanded eligibility for certain simplified accounting methods. The procedures grant upfront approval for a list of specified changes, provided the taxpayer follows the filing instructions. This enables businesses to align their tax accounting with their operational needs or to take advantage of more favorable tax rules. Automatic consent is contingent upon correct and timely submission of the required forms.

Determining Eligibility for the Procedure

Using the automatic change procedures depends on meeting eligibility criteria, primarily qualifying as a “small business taxpayer.” This definition is tied to a gross receipts test outlined in the Internal Revenue Code. To qualify, a business must have average annual gross receipts that do not exceed a certain threshold for the three preceding tax years. For tax years beginning in 2025, this inflation-adjusted threshold is $31 million.

The calculation of average annual gross receipts involves totaling the gross receipts for the three tax years immediately prior to the year of the change and dividing by three. Gross receipts include all sales revenues, amounts received for services, and income from investments. For businesses that have not been in existence for the full three-year period, the test is applied based on the number of years the business has operated.

Beyond the gross receipts test, other factors can affect eligibility. A taxpayer may be ineligible if they are currently under an IRS examination for certain tax periods, unless they fall under specific exceptions. The procedures also specify that certain types of entities, such as tax shelters, are prohibited from using these automatic changes. A business must review these scope limitations to confirm it does not fall into a disqualified category.

Covered Automatic Accounting Method Changes

Once a taxpayer confirms eligibility, they must determine if the desired accounting method change is one of the covered automatic changes. Common changes available under these procedures include:

• Transitioning from the cash method to an accrual method of accounting. The cash method recognizes revenue when cash is received and expenses when paid, while the accrual method recognizes revenue when earned and expenses when incurred. This change is common for growing businesses whose operations become too complex for the cash method.
• Changing the accounting for inventories. Small businesses meeting the gross receipts test can change their inventory method to treat inventory as non-incidental materials and supplies, or they can choose a method that conforms to how inventory is treated in their financial statements.
• Making changes to depreciation or amortization methods for certain property. This could involve correcting an impermissible method of depreciation to a permissible one, such as moving from an incorrect recovery period to the correct period established by law to properly recover asset costs.
• Changing the treatment of prepaid expenses. A business might change from deducting a prepaid expense in the year of payment to capitalizing and amortizing it over the period to which the prepayment relates, such as for insurance or rent paid in advance.

Required Information and Form Completion

To request an automatic accounting method change, a taxpayer must file Form 3115, Application for Change in Accounting Method. The form requires the taxpayer’s name, address, and identification number, and the beginning and ending dates of the tax year for the change. The filer must also provide a description of both the present and proposed methods of accounting and an explanation for the change.

A central component of Form 3115 is the calculation of the Section 481(a) adjustment. This adjustment is required to prevent the duplication or omission of income or deductions resulting from the accounting method change. It represents the cumulative difference between the income and expenses recognized under the old method and what would have been recognized if the new method had been used in all prior years.

The Section 481(a) adjustment can be either positive or negative. A positive adjustment, which increases taxable income, occurs when the change results in an acceleration of income or a deferral of deductions. A negative adjustment, which decreases taxable income, arises when the change leads to a deferral of income or an acceleration of deductions. The adjustment period for a positive adjustment is spread over four tax years, while a negative adjustment is taken into account entirely in the year of the change.

When completing the form for an automatic change, the taxpayer must cite the specific section of the applicable revenue procedure that authorizes the change. The form requires detailed information about the Section 481(a) adjustment, including the amounts for each of the preceding three tax years. The taxpayer must also attach a statement describing the nature of the accounting method change and the item being changed.

The Filing Process

After Form 3115 is completed, the taxpayer must follow a dual-filing requirement. The original, unsigned Form 3115 must be attached to the taxpayer’s timely filed federal income tax return for the year of the change.

In addition, a copy of the signed Form 3115 must be filed with the IRS office in Ogden, Utah. This copy must be filed no earlier than the first day of the year of change and no later than the date the taxpayer files their federal tax return for that year. It is important to retain proof of mailing for this submission.

Because the change is made under an automatic consent procedure, the taxpayer will not receive a formal consent letter from the IRS. Consent is granted automatically if the Form 3115 was completed correctly and filed according to all requirements and deadlines. The taxpayer should implement the new accounting method in the year of change and report the Section 481(a) adjustment as required.