On March 24, 2016, The Internal Revenue Service (IRS) made an announcement regarding the revisions of Form 3115. This was the first update since 2009, and the changes are now required to be used, however the IRS will still accept the previous version of Form 3115 until April 19, 2016. We have summarized the major changes from the IRS below and answered some of the most common questions received by our tax professionals on this subject.
What is new about Form 3115-Application for Change in Accounting Method in 2016?
The new form updates the previous form with formatting changes, allows for multiple change numbers, and adds some new significant questions. Below, we have detailed some of the major changes; however, this is a summary of some of the major changes and should not be considered as an all-encompassing list.
- Duplicate Copy: The IRS has always required a duplicate copy of the form to be filed along with the original. Under the old procedures this form was to be filed in Ogden, Utah. As of January 2016 this duplicate copy is to be filed in Covington, Kentucky.
- Multiple Changes in Accounting: The IRS has added spacing to allow for multiple changes in accounting to be taken on one form.
- Legal Basis: On Page 3, Part II, Lines 16a and 16b the IRS requires that the legal basis supporting the changes be provided. The IRS indicated that in many situations taxpayers had made automatic changes without providing enough legal information to confirm that the taxpayer qualified for the change. Previously this information was only required for non-automatic changes.
These are just three of the changes under this new form. Tax preparers that utilize a Form 3115 should make themselves aware of the modifications to this new form. Per the request of the IRS, if a taxpayer has had a form prepared for the 2015 tax year that has not yet been filed, the form should be updated to the new Form 3115 prior to filing.
In addition to a new Form 3115 and instructions, the IRS announced that the filing location for the duplicate form is changing. Previously under Rev Proc 2015-13, taxpayers were required to file a duplicate Form 3115 with the Ogden, Utah, service center. Effective Jan. 1, 2016, taxpayers should file the duplicate form at the Covington, Kentucky, service center. If prior to April 20, 2016, a taxpayer filed their duplicate Form 3115 with the IRS at either the Ogden, Utah, or Covington, Kentucky, locations using the 2009 Form 3115, the taxpayer may file the original Form 3115 with their return using either the 2009 Form 3115 or the 2015 version.
The filing address to be used for the Covington, Kentucky, center is:
Internal Revenue Service
201 West Rivercenter Blvd.
PIN Team Mail Stop 97
Covington, KY 41011-1424
Types of Accounting Methods Available
What are the different types of accounting methods available?
Cash basis and accrual basis are accounting methods that determine when and how you report income and expenses for tax purposes. In the U.S., the IRS wants you to use the same method each year when reporting income. Depending on your specific situation, there may be additional rules around when to use cash or accrual basis.
What is cash basis?
When cash basis is used as the accounting method, income is reported as payments are received, instead of invoices are issued. Expenses are reported when you pay bills. If invoices are used and bills are received to pay later, then this report method will affect the amount reflected in your A/R and A/P accounts.
What is accrual basis?
With accrual basis as the accounting method, income is reported as soon as invoices are sent to a client (instead of when money is received) and expenses are reported when bills are received.
Accrual basis is more accurate than cash basis reporting. It also allows for better business management by revealing trends in income and expenses well in advance of the actual payments being made or received.
Considering a change in accounting method for your business?
If you are considering a change in accounting method for your business, be sure to ask the right questions before making a move.
- How often can a company change its accounting method?
- What straight-line method changes require IRS approval?
- How does the Tax Year and Accounting Method Impact the Tax Picture for my business?
- If the total amount of the change is less than $25,000, can I spread the adjustment out over several years?
For guidance on this issue, talk to one of our tax professionals today. We’re here to help. Gary Jackson, CPA is the tax and consulting partner and can help determine if a change in accounting method would benefit your business.