All About Changing Your Accounting Method

This blog post has been researched, edited, and approved by John Hanning and Brian Wages. Join our newsletter below.

Research & Experimentation (R&E) Expenditures Update | STG

All businesses need to choose an accounting method to help report income and expenses for taxation purposes. The two main accounting methods are cash and accrual.


With the cash method, income and expenses are reported when received or paid. The accrual method records income when earned and expenses when incurred, using accounts receivable and payable. As a business grows, changing accounting methods may help tax strategy and cash flow.


The IRS requires methods that accurately reflect income consistency. During audits, the IRS investigates accounting records and methods. Businesses should choose a suitable method. Corporations or partnerships with over $25 million in gross income over 3 years, tax shelters, or qualified personal service corporations cannot use cash or hybrid methods. S corporations must use accrual.


Updating Accounting Method Changes


Recent IRS updates impact accounting method changes, especially regarding research and experimentation (R&E) expenses. Rev. Proc. 2023-11 provides less favorable terms for R&E changes not made in the first tax year following updated Sec. 174 rules.


The December 2022 IRS Form 3115 instructions detail newer automatic and non-automatic change procedures. Eligibility criteria and steps now better align with IRS guidance.


Favorable terms for small business taxpayers are outlined in Rev. Proc. 2022-9 and Rev. Proc. 2022-14, offering more flexibility for changes.


Implications of Rev. Proc. 2023-11 for R&E Expenses


Rev. Proc. 2023-11 has significant implications for R&E expense changes. Less favorable terms apply for taxpayers deferring changes beyond the deadline. To benefit, changes should be made immediately in the first tax year following updated Sec. 174 rules.


Latest IRS Form 3115 Instructions


The IRS Form 3115 instructions provide current details on automatic and non-automatic accounting method changes. Eligibility and procedural steps now fully reflect newest IRS guidance. Distinctions outline specific considerations for each change type.


Small Business Flexibility


Rev. Proc. 2022-9 and Rev. Proc. 2022-14 offer more small business flexibility regarding accounting method changes. Favorable terms allow certain taxpayers to receive automatic consent. Small businesses should review whether they qualify for these beneficial procedures.


https://www.irs.gov/pub/irs-drop/rp-23-11.pdf

https://www.irs.gov/forms-pubs/about-form-3115

https://www.irs.gov/pub/irs-pdf/i3115.pdf

https://www.irs.gov/publications/p538

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Changing your accounting method can unlock massive tax savings, but only if you file Form 3115 correctly. This IRS form lets you switch from your current depreciation method to reflect the results of a later cost segregation, potentially saving you tens of thousands—or even hundreds of thousands—of dollars on your taxes. Here's exactly how to do it right. What Exactly Is Form 3115 and Why Does It Matter? Form 3115 is the IRS's "Application for Change in Accounting Method." Think of it as your official request to change how you depreciate business assets, especially when you want to implement cost segregation studies on your previously acquired properties. Here's why this matters: When you originally filed your taxes, you probably depreciated your entire building over 27.5 years (residential) or 39 years (commercial). But with cost segregation, you can reclassify portions of that building into 5, 7, and 15-year property categories, dramatically accelerating your depreciation. The numbers speak for themselves. A cost segregation study on a $13.5 million retail shopping center purchased in 2021 generated $1,168,876 in tax savings in the first year alone. That's the power of properly executed accounting method changes.
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