! 481(a) adjustments) from changes under DCN 248

CAUTION included in the same Form 3115 must be stated in

accordance with section 6.22(8) of Rev. Proc. 2022-14.

Example 1. Under its present method, XYZ Corporation is deducting certain costs that are required to be capitalized into inventory under section 263A. XYZ Corporation is proposing to change its account method to properly capitalize such costs. The computation of the section 481(a) adjustment with respect to the accounting method change is demonstrated as follows.

Salary bonuses treated as incurred

under the present method, but not incurred under the proposed method . . . . . . . . . . . . . . . . $40,000 Beginning inventory as of January. 1,

2022, with capitalized salary bonuses computed under the present method . . . . . . . . . . . . . . . . $100,000 Beginning inventory as of January. 1,

2022, with capitalized salary bonuses, computed under the proposed method . . . . . . . . . . . . . . . . $92,000

Decrease in beginning inventory as of

January. 1, 2022 . . . . . . . . . . . ($8,000)

Beginning inventory for year of change under

proposed method . . . . . . . . . . . . . . . . . $120,000 Beginning inventory for year of change under present

method . . . . . . . . . . . . . . . . . . . . . . . $100,000

Section 481(a) adjustment . . . . . . . . . . . . . . +$20,000

Example 2. WXY Corporation, a calendar year taxpayer, is a producer and capitalizes costs that are required to be capitalized into inventory under section 263A. Each February, WXY Corporation pays a salary bonus to each employee who remains in its employment as of January 31 for the employee's services provided in the prior calendar year. Under its present method, WXY Corporation treats these salary bonuses as incurred in the tax year the employee provides the related services. For 2022, WXY Corporation proposes to change its accounting method to treat salary bonuses as incurred in the tax year in which all events have occurred that establish the fact of the liability to pay the salary bonuses and the amount of the liability can be determined with reasonable accuracy, pursuant to section 20.01(2) of Rev. Proc. 2022-14. The computation of WXY Corporation's net section 481(a) adjustment for the change in accounting method for salary bonuses is demonstrated as follows.

-10-

Net section 481(a) adjustment . . . . +$32,000

Line 26. In computing the net section 481(a) adjustment, an applicant must take into account all relevant accounts. For some changes (for example, a change that affects multiple accounts), the section 481(a) adjustment is a net section 481(a) adjustment. See Example 2 above and the example under Schedule A, Part l, line 2h , later. If there is more than one method change requested, the section 481(a) adjustment is generally separately stated for each method change. However, some changes may require the netting of section 481(a) adjustments with those for certain other method changes made during the same year of change. See, for example, certain changes under section 16.10 of Rev. Proc. 2022-14.

If an election has been made under Regulations section 1.59A-3(c)(6)(i) to waive an allowed deduction for purposes of determining the section 59A base erosion and anti-abuse tax, and the method of accounting for the waived deduction is being changed, the amount of the net section 481(a) adjustment is determined without regard to the waived deduction. See Regulations section 1.59A-3(c)(6)(iii)(D). As a result, a waived deduction has no effect on the calculation of the amount of a section 481(a) adjustment. For an example illustrating how to calculate a section 481(a) adjustment with respect to a method of accounting for which an applicant has waived deductions, see Regulations 1.59A-3(d)(9) (Example 9) .

Line 27. Certain automatic method changes require an applicant with a section 481(a) adjustment remaining on a prior change in accounting method to take the remaining portion of the prior section 481(a) adjustment into account in the year of change. See, for example, DCNs 234 and 262. If applicable, enter the amount of the remaining portion of the section 481(a) adjustment from the prior change.

Line 28. An applicant may elect a 1-year section 481(a) adjustment period for a positive section 481(a) adjustment that is less than $50,000. See section 7.03(3)(c) of Rev. Proc. 2015-13. An applicant may also elect a 1-year section 481(a) adjustment period for all positive section 481(a) adjustments for the year of change if an eligible acquisition transaction occurs during the year of change or in the subsequent tax year on or before the due date for filing the applicant's federal tax return for the year of change. For more details about the eligible acquisition transaction election, see section 7.03(3)(d) of Rev. Proc. 2015-13.

Line 29. If “Yes,” explain the nature and amount of the section 481 adjustment attributable to the intercompany transaction(s).