Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the RIC’s books and records. In all cases, the method used must clearly reflect taxable income.

Generally, permissible methods include:

• Cash,

• Accrual, or

• Any other method authorized by the Internal Revenue Code.

For more information, see Pub. 538, Accounting Periods and Methods.

Accrual method. Generally, a RIC must use the accrual method of accounting if its average annual gross receipts for the prior 3 years exceed $31 million. See section 448(c).

Mark-to-market accounting method. Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be held at its fair market value (FMV).

Any security held by a dealer that is not inventory and held at the close of the tax year is treated as sold at its

Instructions for Form 1120-RIC (2025) 5

FMV on the last business day of the tax year. Any resulting gain or loss must be taken into account that year in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss.

For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 97-39, 1997-39 I.R.B. 4.

Dealers in commodities and traders in securities and commodities may elect, with some exceptions, to use the mark-to-market accounting method. To make the election, the RIC must file a statement describing the election, the first tax year the election is to be effective, and in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-7 I.R.B. 52, and sections 475(e) and (f).

Change in accounting method. Generally, the RIC must get IRS consent to change either an overall method of accounting or the accounting treatment of any material item for income tax purposes. To obtain consent, the RIC must file Form 3115, Application for Change in Accounting Method, during the tax year for which the change is requested. See the Instructions for Form 3115 and Pub. 538 for more information and exceptions. Also, see the Instructions for Form 3115 for procedures that may apply for obtaining automatic consent to change certain methods of accounting, non-automatic change procedures, and reduced Form 3115 filing requirements.