Income for Businesses and Changes in Accounting Methods


Income for Businesses and Changes in Accounting Methods

By Smith & Smith & Ruiz CPA's

The IRS released modifications to their automatic accounting methods (Rev. Proc. 2016-29) on May 5, 2016. This change allows the List of Automatic Changes permitted to be filed under Rev. Proc. 2015-13, and replaces the Rev. Proc. 2015-14 guidance, which contained the current list of automatic changes.

Listing the Major Changes that can Affect Income for Businesses

  • As a Taxpayer, you can no longer make an automatic change for an impermissible to a permissible method of accounting for depreciation on any property for which you have claimed a federal income tax credit.
  • The percentage-of-completion method for long-term contracts is now void of the automatic change provision.
  • You don’t have the provision to make an automatic change for amounts paid or incurred for repair and maintenance costs. This includes costs from capitalizing to deducting, but only if you have claimed a federal tax credit or chosen to accelerate alternative minimum tax (AMT) credits in lieu of taking bonus depreciation under possible property changes.
  • You can now change your method of accounting for the identification and valuation of inventory if the change is from an impermissible method of accounting as stated in section 471. Previously, only the automatic change procedures were permitted if the change was from an impermissible method of accounting as described in Reg. sections 1.471-2(f) (1) through (5).
  • The guidance also adds two more changes relating to start-up expenditures under section 195 and interest capitalization under section 263A.

You can read up on the entire IRS notice on their website or follow this link.

The rules cover a wide range of method changes. There are detailed instructions and information on issues like upfront payments utilities receive for network upgrades, the cost of accounting for small wares purchased by a restaurant or tavern, and changes in the method of accounting for bad debts from a reserve or other improper method to a specific charge-off method.

automatic accounting methods

The IRS has also made changes from incorrect to correct depreciation methods, startup expenditures, capital expenditures, including changes related to the property regulations, and method changes under uniform capitalization rules.

Changes in Business Incomes and Accounting Method

A change in accounting method is a change in the entire accounting plan for gross income or deductions (cash or accrual), or in the treatment of a material item.

If a practice does not permanently affect your lifetime income but does affect the taxable year for which the income is reported or a deduction is made, it requires timing and will be considered an accounting method.

Corrections of mathematical or posting errors or errors in the computation of tax liability are not considered changes in accounting method.

These changes will alter the outlook on how businesses will write up transactions for their yearly income. Your tax preparation includes detailed reports on your accounting methods and this will ensure that most of your financial planning has been legitimate.

Your overall income from the business does not change, but the change in accounting method will affect the way you report your transactions as well as your tax preparation strategy.

For more information on this topic, or to learn how Smith & Smith CPA’s tax specialists can help, contact our team.