How Reviewing Your Accounting Methods Regularly Is a Smart Business Move

March 2, 2017

It’s a good idea to review your methods of accounting on a regular basis, because making strategic changes to your accounting methods could help you to:

  • Minimize your income tax bill (by changing to a more advantageous method)
  • Comply with new laws and regulations
  • Reflect changes in your business activities or environment
  • Minimize your audit risk (by correcting an impermissible accounting method)

There is an extra incentive for voluntarily correcting a method of accounting that is not currently permissible. Not only do you reduce your audit risk, but in most cases you can take any additional income into account over four years.

A method of accounting can apply either to the overall accounting for your business (i.e., cash versus accrual) or to the treatment of a specific item. Some examples of specific items or activities to focus on when reviewing your methods of accounting include:

General Business Accounting Method Items

Real Estate and Construction Items

Technology, Health Care, and Industrial Items

  • Research and development expenditures policies
  • Regular research and development (“R&D”) credit
  • Alternative simplified method R&D credit
  • Application of uniform capitalization rules under IRC Section 263A
  • Expensing/capitalization policies for production assets
  • Application of the recurring item exception
  • Deferral method for advance payments
  • Claiming of domestic production activities deduction

Each business and industry is different, and new rules and court cases often provide opportunities that were not there before. So a method that is appropriate for your friend’s business may not be right for yours, and even what was right for your business five years ago may not be right now.

If you do want to change a method of accounting for Federal income tax purposes, you may not be allowed to make the change unilaterally. For some method changes, you must get permission from the IRS and pay a fee. For other changes, the IRS provides automatic change procedures, and no fee is required. However, certain requirements must be met, and the automatic change procedures generally cannot be used more than once every five years with respect to a particular accounting method.

The current accounting method change procedures are generally found in Rev. Proc. 2015-13, which was released in January 2015. Rev. Proc. 2016-29 contains a list of most accounting method changes that can be made using the automatic change procedures. Some of these changes can only be made automatically within a specified time period, which is often the case when there are changes in tax laws or regulations.

IRS Notice 2017-6

IRS Notice 2017-6 extends an opportunity to make certain accounting method changes automatically for tax years beginning before January 1, 2017, even if you had previously changed the method within the prior five years. This provides you with an opportunity to correct or unwind previous accounting method changes based on the tangible property regulations (“TPR”) and can be particularly useful if you were an early adopter of those regulations. It also allows you to avoid having to pay a fee in order to make the changes.

The Notice extends the time you have to make certain automatic changes to apply the TPR. It also allows you to make certain changes to your TPR methodology, depreciation and dispositions under IRC Section 168 without consent.

What This Means to You

IRS Notice 2017-6 provides a good opportunity for you to come into compliance with the tangible property regulations. If you were one of those people who made accounting method changes early pursuant to the temporary and/or proposed TPR, now is a great time to revise or undo any changes that don’t comply with the final regulations, particularly when the final TPR are more advantageous. It also serves as a reminder that you do not need to keep all accounting methods forever.

Contact Cherry Bekaert’s Credits/Accounting Methods team to start the conversation and find out how you can save money by changing the accounting methods you use for income tax purposes. Or reach out to a local member of your client service team so they can answer questions and guide you through the transitions.