Presenting a live 110‐minute teleconference with interactive Q&A Form 3115: New Procedures for Changing Accounting Methods for Changing Accounting Methods Mastering Latest Rules and Guidance 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, OCTOBER 12, 2011 Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Gregg Hamm Senior Manager Boyer & Ritter Camp Hill Pa Gregg Hamm, Senior Manager , Boyer & Ritter, Camp Hill, Pa. Michael Lueck, Director, Washington National Tax (Income Tax & Accounting), KPMG, Detroit Ellen McElroy, Partner, Pepper Hamilton, Washington, D.C. Karen Messner , Manager, Federal Tax Services Group, Ernst & Young, Washington, D.C. For this program, attendees must listen to the audio over the telephone. Karen Messner , Manager, Federal Tax Services Group, Ernst & Young, Washington, D.C. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.
Transcript
Presenting a live 110‐minute teleconference with interactive Q&A
Form 3115: New Procedures for Changing Accounting Methodsfor Changing Accounting MethodsMastering Latest Rules and Guidance
Gregg Hamm Senior Manager Boyer & Ritter Camp Hill PaGregg Hamm, Senior Manager, Boyer & Ritter, Camp Hill, Pa.
Michael Lueck, Director, Washington National Tax (Income Tax & Accounting), KPMG, Detroit
Ellen McElroy, Partner, Pepper Hamilton, Washington, D.C.
Karen Messner, Manager, Federal Tax Services Group, Ernst & Young, Washington, D.C.
For this program, attendees must listen to the audio over the telephone.
Karen Messner, Manager, Federal Tax Services Group, Ernst & Young, Washington, D.C.
Please refer to the instructions emailed to the registrant for the dial-in information.Attendees can still view the presentation slides online. If you have any questions, pleasecontact Customer Service at1-800-926-7926 ext. 10.
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Form 3115: New Procedures for Ch i A ti M th d Changing Accounting Methods Seminar
Previous Guidance On Reporting Accounting Methods Changes[Michael Lueck]
Slide 7 – Slide 15
Key Terms Of Latest Guidance On Accounting Methods Changes[Gregg Hamm]
Slide 16 – Slide 29
Timing Issues In Reporting A Change In Accounting Methods[Ellen McElroy]
Slide 30 – Slide 43
Procedures For Filing Form 3115[Karen Messner]
Slide 44 – Slide 54
PREVIOUS GUIDANCE ON Michael Lueck, KPMG
PREVIOUS GUIDANCE ON REPORTING ACCOUNTING METHODS CHANGES
S F kStatutory Framework
I. Internal Revenue Code Sect. 446(e)
A. Requires IRS consent before implementing a new method on a return
II. Obtaining IRS consent
1. Advance consent: Rev. Proc. 97-27
a. Form 3115 filed with IRS National Office
b Governed by first revenue procedure of year (e g Rev Proc b. Governed by first revenue procedure of year (e.g., Rev. Proc. 2011-1)
c. IRS National Office issues a letter ruling granting consent
2 A t ti t R P 2011 142. Automatic consent: Rev. Proc. 2011-14
a. Original Form 3115 attached to timely filed federal tax return
b. Copy of Form 3115 filed with IRS National Office or Ogden Service Center, as directed by applicable Revenue Procedure
8
Ad CAdvance Consent
I. Rev. Proc. 70-27
A. Developed to encourage voluntary method changes
B. Permitted a 10-year spread for Sect. 481(a) adjustments
C. Generally permitted to be filed within 180 days of the year of change (during IRS examinations unless in first year of an impermissible method)
II. Rev. Proc. 80-51
A. Reduced the 481(a) spread (varied based on type of change)
B. Introduced 90-day window period following close of examination
III R P 84 74III. Rev. Proc. 84-74
A. Further reduced the 481(a) spread
B. Increased 90-day window to 120-day window
C. Introduced 30-day window after close of taxable year
9
Ad C (C )Advance Consent (Cont.)
IV. Rev. Proc. 92-20
A. Introduced 90-day window period following beginning of IRS examination
B. Required the filing of Form 3115 within the year of change
C. Introduced a gradation of incentives
1. More favorable treatment for changes made prior to IRS examination
a. Prospective change
b. Spread of Sect. 481(a) adjustment
c. Provides audit protection
2. Moderate treatment for voluntary changes made during IRS examination
a. Three-year spread for positive 481(a) adjustment, beginning in the earlier of the earliest year of IRS examination or the first year of the impermissible method
b Three-year spread for negative 481(a) beginning in the year of the b. Three year spread for negative 481(a), beginning in the year of the filing of the Form 3115
10
Ad C (C )Advance Consent (Cont.)
V. Rev. Proc. 97-27
A. Eliminated 90-day window following the beginning of IRS examination
B. Introduced four instances in which a Form 3115 could be filed:
1. When taxpayer is not under examination
2. First 90 days of taxable year
3 First 120 days following the close of an IRS examination3. First 120 days following the close of an IRS examination
4. With director consent
VI. Rev. Proc. 2002-18
A. Allowed certain taxpayers under exam, in appeals or litigation to file Form 3115 with no audit protection
B. Reduced from four years to one year the spread period for net negative 481(a) adjustments
11
A i CAutomatic Consent
I. Background of automatic consent
A. Provided for purposes of administrative ease
1. Fewer consent letters need to be issued by IRS National Office.
2. Taxpayers permitted to make change without burden of going through IRS National Office.
3. Generally limited to “plain vanilla” changesy p g
4. If applicable, provides exclusive provisions for the change
B. Example: Rev. Proc. 94-49
A A li bl f UNICAP h f ll i fi li ti f l tiA. Applicable for UNICAP changes following finalization of regulations
B. Anticipated that all taxpayers with inventory would file Form 3115
C. Feared to be too overwhelming for the IRS National Office
D. Delegates review to IRS examination function
12
A i C (C )Automatic Consent (Cont.)II Rev Proc 97-37II. Rev. Proc. 97 37
A. First consolidated revenue procedure
1. Included approximately 25 common method changes
2. Superseded many prior revenue procedures applicable to single method changes
B All eligible changes are outlined in an appendixB. All eligible changes are outlined in an appendix.
C. Grants consent to any taxpayer in compliance with all provisions
D. Not available to taxpayers that made similar change within four years
III. Revenue procedures 98-60, 99-49 and 2002-9
A Added several additional eligible changesA. Added several additional eligible changes
B. Clarified many definitions13
A i C (C )Automatic Consent (Cont.)
IV. Rev. Proc. 2008-52
A. Introduced automatic accounting method change numbers
B Add d l dditi l li ibl hB. Added several additional eligible changes
C. Total eligible methods exceeded 140
V. Rev. Proc. 2009-39
A. Added several additional eligible changesA. Added several additional eligible changes
B. Modified several definitions
C. Total eligible changes exceeded 140
14
U d d G idUpdated Guidance
I M t lt ith li bl dI. Must consult with applicable revenue procedure
II Form 3115 and instructions are not updated regularlyII. Form 3115 and instructions are not updated regularly.
15
KEY TERMS OF LATEST Gregg Hamm, Boyer & Ritter
KEY TERMS OF LATEST GUIDANCE ON ACCOUNTING METHODS CHANGES
R P d Revenue Procedure 2011‐14
I P d l d d fi iti hI. Procedural and definition changes
II Consolidates additional automatic change methods published II. Consolidates additional automatic change methods published subsequent to Rev. Proc. 2008-52 and Rev. Proc. 2009-39, and adds three new automatic change methods
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R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Changes to general provision
A. Definition of “under examination”: A taxpayer will be considered to remain under examination as long as it has a refund or credit that continues to be under review by the Joint Committee on Taxationunder review by the Joint Committee on Taxation.
B. Issues at appeals or in federal court: Taxpayers before an appeals office or appeals court with respect to any income tax issue may now request a method change without audit protection, if the method change is an issue under consideration by appeals or a federal court.
C. Automatic consent provisions: In order to receive automatic consent for the method change request, the taxpayer must comply with Rev. Proc. 2011-14 and implement the change on its federal income tax return for the requested and implement the change on its federal income tax return for the requested year of change to which the original Form 3115 is attached.
D. Duplicate filing requirement: Duplicate copy for most depreciation changes must be filed with the Ogden Utah service center in lieu of the IRS national goffice.
18
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Transition rules
A. Automatic changes: Effective for Forms 3115 filed on or after Jan. 10, 2011 for a year of change ending on or after , y g gApril 30, 2010
B. Non-automatic changes: Effective for Forms 3115 filed on or after Jan. 10, 2011 for a year of change ending on or after Jan. 10, 2011
19
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Automatic changes nos. 150 and 151: Safe harbor methods under 263A for certain dealerships of motor vehicles
A No 150: Treat sales facility as retail sales facilityA. No. 150: Treat sales facility as retail sales facility
B. No. 151: Treated as retailer without production activities
C. Definition of motor vehicle dealers expands beyond new p yand use cars.
D. Both changes can be made on same Form 3115.
E. See Rev. Proc. 2010-44
20
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Automatic change No. 152: Elective expensing provision (§179D)
A. Deduct under §179D amount paid or incurred for the installation of energy efficient commercial building property
B. The deduction of energy efficient commercial building property must be claimed in the taxable year in which the property is placed in service.
C. The basis of the property is reduced by the amount of §179D deduction taken.
D N dit t tiD. No audit protection
21
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Automatic change No. 153: Advance payments – Change in applicable financial statements
A. Applies to a taxpayer that (a) receives advance payments, as defined in Rev. Proc 2004-34; (b) uses the deferral method described in Sect 5 02(3)(a) of Proc. 2004-34; (b) uses the deferral method described in Sect. 5.02(3)(a) of Rev. Proc. 2004-34 for including those advance payments in gross income in accordance with its applicable financial statement; (c) changes the manner in which it recognizes advance payments in its applicable financial statements; and (d) wants to change its method of acco nting to se its new method of and (d) wants to change its method of accounting to use its new method of recognizing advance payments in revenue in its applicable financial statements for determining the extent to which advance payments are included in gross income under Rev. Proc. 2004-34
B. Change is made on a cut-off basis
22
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I A t ti h N 154 C lif i f hi tI. Automatic change No. 154: California franchise tax
A Applies to a taxpayer that wants to change its method of A. Applies to a taxpayer that wants to change its method of accounting for California franchise taxes to a method consistent with the holding in Rev. Rul. 2003-90.
23
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I A t ti h N 155 C t i h i th d f I. Automatic change No. 155: Certain changes in method of accounting for organizations to which §833 applies
A. Applies to an existing Blue Cross or Blue Shield organization within the meaning of §833(c)(2) or an organi ation described in §833(c)(3) that is req ired toorganization described in §833(c)(3), that is required to change its method of accounting for unearned premiums by reason of failing to meet the MRL requirements.
24
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Automatic change No. 156: Gift cards issued as a refund for returned goods
A. Applies to an accrual method taxpayer that sells goods at retail and wants to change its method of accounting for gift cards issued as a refund for returned goods, in order g g ,to treat the transaction as (1) the payment of cash refund in the amount of the gift card, and (2) the sale of a gift card in the amount of the gift card.card in the amount of the gift card.
B. Scope limitations in Sect. 4.02 do not apply to the taxpayer’s first and second taxable year ending on or after D 31 2010Dec. 31, 2010.
25
R P d (C )Revenue Procedure 2011‐14 (Cont.)
I. Other significant changes
A. Appendix Sect. 3.06(3), relating to changes to deduct repairs and maintenance costs, modifies the date the additional Ogden UT copy of F 3115 t b fil dForm 3115 must be filed.
B. Appendix Sect. 6.01, relating to changes from impermissible to permissible depreciation methods, clarifies that the amount of allowable depreciation takes into account all first-year depreciation deduction depreciation takes into account all first-year depreciation deduction provisions.
C. Appendix sections 6.24 and 6.25, relating to changes for dispositions of structural components of a building and tangible depreciable assets, structural components of a building and tangible depreciable assets, require that an additional statement be provided with Form 3115.
D. Appendix Sect. 22.01(7), relating to changes from the LIFO method to a non-LIFO method, is clarified to require the calculation of a Sect. 481(a) adjustment.
26
Fi l S 8 ( ) R l iFinal Sect. 381(c) Regulations
I Eff ti f S t 381( ) t ti th t ft A I. Effective for Sect. 381(a) transactions that occur after Aug. 30, 2011
II. Acquiring corporation and distributor/transferor use same method prior to Sect. 381(a) transaction; such accounting methods will carry over unless IRS consent is requestedmethods will carry over, unless IRS consent is requested.
27
l ( ) l ( )Final Sect. 381(c) Regulations (Cont.)
I Acquiring corporation and distributor/transferor use different I. Acquiring corporation and distributor/transferor use different methods of accounting with respect to an item, and the entities are integrated in a Sect. 381(a) transaction.
A Principal method of accounting must be adoptedA. Principal method of accounting must be adopted.
B. Principal method test is made at the trade or business level.
C. Form 3115 is not required to be filed in order to change to the principal method.
D. No audit protection for change to principal method
E A 481(a) adjustment must be recognized by acquiring E. A 481(a) adjustment must be recognized by acquiring corporation, beginning with the tax year that includes the date of the Sect. 381(a) transaction.
F If th i i l th d i i i ibl th d F 3115 F. If the principal method is an impermissible method, Form 3115 must be filed to change to use a permissible method.
28
l ( ) l ( )Final Sect. 381(c) Regulations (Cont.)
I. Distributor/transferor trade or business maintained separately from that of the acquiring corporationseparately from that of the acquiring corporation
A. Each separate trade or business will continue to use the pmethods of accounting used prior to the transaction.
B. If impermissible method, must change to permissible method
29
TIMING ISSUES IN Ellen McElroy, Pepper Hamilton
REPORTING A CHANGE IN ACCOUNTING METHODSACCOUNTING METHODS
Significance Of Methods Of Accounting
I. Allows changes to items in closed years
II. Audit protection available
III. Changing an accounting method requires advance IRS consent and mutual agreement regarding terms and conditions of the change.
31
Wh I A M h d Of A i ?What Is A Method Of Accounting?
• No specific definition of a method of accounting or a change in method of accountingmethod of accounting
• Three hallmarks
― Consistency
― Certainty and predictability
― Timing
32
What is a Method of Accounting?Ti i ElTiming Element
If the practice does not permanently affect the taxpayer’s lifetimeIf the practice does not permanently affect the taxpayer s lifetime income but could change the taxable year in which income is reported, it involves timing and is therefore a method of accounting.
33
h h dWhat Is NOT An Accounting Method?
• Computational errors
Ch i h t i ti• Changes in characterization
• Certain changes in estimates• Certain changes in estimates
• Changes in underlying factsChanges in underlying facts
34
What Is A Method Of Accounting? (Cont.)
• Unlike when changing a method, no IRS consent is required to adopt a method.
• A taxpayer may adopt any eligible method.
• IRS view: A method of accounting has been ADOPTED if:
― Improper method is selected, then through use on two consecutive returns
― Proper method is selected, when use on one return
35
What Is A Change In Method Of Accounting? (Cont.)
Treas. Reg. §1.446-1(e)(2)(ii)(a) defines changes as including:
A h i ll l f ti― A change in overall plan of accounting; or
― A change in treatment of any material item
• Defines a ”material Item” as any item involving the proper time• Defines a material Item as any item involving the proper time for income inclusion or deduction
Due date With original, timely-filed return, i l di t i
Last day of the taxable yearincluding extensions
Filing fee None $4,200 plus $150 for additional legal entities
Where to file Tax return; duplicate required to IRS NO or Ogden
IRS NO
Spread of Sect. 481(a) Negative adjustment: One yearPositive adjustment: Four years
M TP d fil ? TP t ll fil th d h h d b t TPMay TP under exam file? TP cannot generally file method change when under exam but TP:i) May secure DD consent to file change; or ii) May file (unless method is “issue under consideration” or “in suspense”) if within either: --- First 90 days of tax year if under continuous exam for 12
40
y ymonths--- 120 days of the close of an exam
Voluntary Changes: Form 3115 PracticeAnd Review By IRSAnd Review By IRS
Old Process Current ProcessOld Process Current Process
Form 3115: Skeletal form was typical Form 3115: Detailed form required, and it should anticipate IRS questionsand it should anticipate IRS questions
21-day letter: Rare 21-day letter: Common, and it requires audit-level detailrequires audit level detail
Adverse conference: Rare Adverse conference: Should be anticipated
C t l tt St d d t t C t l tt F tl i l dConsent letter: Standard text Consent letter: Frequently includes detailed limitations
IRS exam review: Generally limited to i f S 481( ) l l i
IRS review: Thorough, and may i TAM li i i f
41
review of Sect. 481(a) calculation require TAM or litigation to enforce
IRS Exam And Review Of Accounting Methods
• With increased frequency, IRS examining agents challenge taxpayer’s use of particular accounting methods.
• IRS exam may challenge:S e a ay c a e ge― Taxpayer’s eligibility to use a particular method, and/or― Whether taxpayer has properly applied a method, including
th d d i t ti th d hmethods approved in non-automatic method changes approved by IRS NO.
• Such techniques are applied in an effort to make IRS exam adjustments, which can be costly when implemented through a one-year adjustment in the earliest open year.
42
How To Resolve Accounting MethodChange Disputes In Exam Context
• Stay informed about involvement of technical advisors• Be prepared to thoroughly review and demonstrate taxpayer’s
practices, in order to establish method eligibility and to show p ac ces, o de o es ab s e od e g b y a d o s othat accounting method has been applied correctly
• May need to request/access dispute resolution strategies including TAM process GLAM and/or pre filing agreementincluding TAM process, GLAM and/or pre-filing agreement
• Fast-track can facilitate settlement with accounting method challenges
43
PROCEDURES FOR FILING Karen Messner, Ernst & Young
FORM 3115
P d F Fili F Procedures For Filing Form 3115
I. General procedures
A. Scope limitations (Sect. 4 of Rev. Procs. 2011-14 and 97-27)
1 Under examination (exceptions discussed in B)1. Under examination (exceptions discussed in B)
2. Partnerships and S corporations (if method to be changed is an issue under consideration in an examination of a partner, member or shareholder’s federal income tax return)member or shareholder’s federal income tax return)
3. Sect. 381(a) transactions (exceptions for automatic – no differences in methods and separate trades or businesses)
4. Final year of trade or businesses
5. Prior change in same method within five years
45
Procedures For Filing Form 3115 (Cont.)
I General procedures (Cont )I. General procedures (Cont.)
B. Examination window periods (Sect. 6.03 of Rev. Proc. 2011-14, Sect. 6.01 of Rev. Proc. 97-27)
1 90 day window period: Under exam for at least 12 consecutive 1. 90-day window period: Under exam for at least 12 consecutive months as of the first day of the taxable year; method cannot be issue under consideration or issue placed in suspense at the time Form 3115 is filed; file during first 90 days of taxable year
2. 120-day window period: Examination ends (as defined in Rev. Proc.); method cannot be issue under consideration or issue placed in suspense at the time Form 3115 is filed; file during the 120-day
i d f ll i th d t i ti dperiod following the date an examination ends
3. Consent of director: Director will consent to filing of 3115 unless the method to be changed would ordinarily be included as an item of adjustment in the year(s) for which the taxpayer is under of adjustment in the year(s) for which the taxpayer is under examination.
46
Procedures For Filing Form 3115 (Cont.)
I General procedures (Cont )I. General procedures (Cont.)
B. Examination window periods (Sect. 6.03 of Rev. Proc. 2011-14, Sect. 6.01 of Rev. Proc. 97-27), Cont.
4 Changes lacking audit protection (automatic only): Description of 4. Changes lacking audit protection (automatic only): Description of change in the Appendix provides that the change is not subject to the audit protection provisions of Sect. 7.
5. Issue pending: Service has given the taxpayer written notification 5. Issue pending: Service has given the taxpayer written notification indicating an adjustment is being made or will be proposed with respect to the method of accounting; no audit protection.
6. Taxpayer before Appeals office: Under exam and not able to use above exceptions; method to be changed is an issue under consideration by the appeals office; no audit protection
7. Taxpayer before federal court: Under exam and not able to use above exceptions; method to be changed is an issue under consideration by the federal court; no audit protection
47
Procedures For Filing Form 3115 (Cont.)II. Difficult decisions faced in reporting
A. Changing for exposure items when under examination
1. Consider:
a Change to proper method by filing Form 3115 before IRS finds a. Change to proper method by filing Form 3115 before IRS finds item on examination (terms for making voluntary change more favorable than when IRS makes change on exam)
b Try to obtain audit protectionb. Try to obtain audit protection
c. When under examination, can an exception be used to file the Form 3115?
d Do not want to bring item to attention of examining agent (be d. Do not want to bring item to attention of examining agent (be cautious with director consent)
e. Interest and penalties may apply if item is found on examination.examination.
2. Unable to file Form 3115
48
Procedures For Filing Form 3115 (Cont.)
II Diffi lt d i i f d i ti (C t )II. Difficult decisions faced in reporting (Cont.)
B. Advance consent change not granted by time federal income tax return for year of change must be filed
1. Procedures to request revised year of change in Rev. Proc. 2007-67
a. Favorable Sect. 481(a) amount picked up in revised year of change
b. Unfavorable Sect. 481(a) amount – percentage that would have been taken into account for each prior taxable year accelerated into revised year of change
2. File return on present method (Treas. Reg. Sect. 1.446-1(e)(2)(i))
3. File return on proposed method (Rev. Proc. 2011-1, Sect. 9.17)
49
Procedures For Filing Form 3115 (Cont.)
II. Difficult decisions faced in reporting (Cont.)
C. Planning opportunities
1. Consider:
a. If change results in favorable (negative) Sect. 481(a) adjustment, and change is automatic, then determine the most favorable year of change.
b. Reduce current year tax or increase NOLs, in b. Reduce current year tax or increase NOLs, in order to obtain cash from prior profitable years.
50
Procedures For Filing Form 3115 (Cont.)
III. Timing for filing Form 3115
A. Automatic change
1. Duplicate filingp g
a. Original Form 3115 attached to timely filed (including extensions) original federal income tax return for the year of change
b. Copy of Form 3115 must be filed with IRS National Office or Ogden UT no later than the date the taxpayer files the original Form 3115 with the federal income tax return for the year of change.
2. May need to file earlier if under examination and filing under 90-day or 120 day window120-day window
3. No user fee
4. Must provide copies to IRS examining agent, appeals officer and/or counsel to government no later than date taxpayer files the IRS National counsel to government no later than date taxpayer files the IRS National Office copy or Ogden UT copy
51
Procedures For Filing Form 3115 (Cont.)
III Timing for filing Form 3115 (Cont )III. Timing for filing Form 3115 (Cont.)
B. Advance consent change
1. Form 3115 must be filed with IRS National Office 1. Form 3115 must be filed with IRS National Office during the year of change.
2. You may need to file earlier if you are under i ti d fili d 90 120 d i dexamination and filing under 90- or 120-day window.
3. User fee: Currently $4,200 + $150 for each additional entityy
4. Must provide copies to IRS examining agent, appeals officer and/or counsel to government at the same ti th igi l F 3115 i fil d ith th IRS time the original Form 3115 is filed with the IRS National Office.
52
Procedures For Filing Form 3115 (Cont.)
IV Timing of Sect 481(a) adjustmentIV. Timing of Sect. 481(a) adjustment
A. Sect. 481(a) adjustment prevents amounts from being duplicated or omitted when taxable income is computed under a method of accounting different from method used to compute taxable income for the different from method used to compute taxable income for the preceding taxable year.
1. Unfavorable (positive) adjustment: Four taxable years
a De minimis rule: Elect one year period if amount less than a. De minimis rule: Elect one year period if amount less than $25,000
b. Accelerate remaining balance if cease to engage in trade or business or terminate existence (section 5.04(3) of Rev. Proc. business or terminate existence (section 5.04(3) of Rev. Proc. 2011-14; section 7.03(3) of Rev. Proc. 97-27)
c. Short taxable year treated as full 12-month taxable year
2 Favorable (negative) adjustment year of change2. Favorable (negative) adjustment – year of change
53
Procedures For Filing Form 3115 (Cont.)
IV. Timing of Sect. 481(a) adjustment (Cont.)
B. Cut-off method: Only items arising on or after the beginning of the year of change are accounted for under the new method of accounting. Any items arising before the year of change continue to be accounted for under the former method of accounting.
C. For CFCs not using the U.S. dollar as their functional currency the Sect 481(a) should be stated in the CFC’s currency, the Sect. 481(a) should be stated in the CFC s functional currency.
