Schedule A—Change in Overall Method of Accounting

Part I—Change in Overall Method All applicants filing to change their overall accounting method must complete Schedule A, Part I, including applicants filing under DCNs 122, 126, 127, 128, 233, 257, 258, and 259 in the List of Automatic Changes.

Lines 2a–g. Enter the amounts requested on lines 2a through 2g, even though the calculation of some amounts may not have been required in determining taxable income due to the applicant's present accounting method. Applicants with an applicable financial statement changing to an accrual method and entering an amount on line 2a should complete Schedule B if the income is subject to section 451(b).

Note. Do not include amounts that are not attributable to the accounting method change, such as amounts that correct a math or posting error or errors in calculating tax liability. In addition, for a bank changing to an overall cash/hybrid method of accounting, do not include any amounts attributable to a special method of accounting. See DCN 127.

Line 2b. Enter amounts received or reported as income in a prior year that were not earned as of the beginning of the year of change. For example, an advance payment received in a prior year for goods that were not delivered by the beginning of the year of change may be reported in the subsequent year if the applicant qualifies under Regulations section 1.451-8(c) or (d), as applicable. If any amounts entered on line 2b are for advance payments, complete Schedule B.

Line 2h. Enter the net amount, which is the net section 481(a) adjustment, on line 2h. Also, enter the net section 481(a) adjustment on Part IV, line 26. See the instructions for Part IV, line 26, earlier.

The following example illustrates how an applicant calculates the section 481(a) adjustment when changing to an accrual method, a nonaccrual-experience method, and the recurring item exception.

Example. ABC Corporation, a calendar year taxpayer using the cash method of accounting, has the following items of unreported income and expense on December 31, 2021.

Accrued income . . . . . . . . . . . . . . . . . . . . . . $250,000 Uncollectible amounts based on

the nonaccrual-experience method . . . . . . . . . 50,000 Accrued amounts properly deductible

(economic performance has occurred) . . . . . . . 75,000 Expenses eligible for recurring item

exception . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

ABC Corporation changes to an overall accrual method, a nonaccrual-experience method, and the recurring item exception for calendar year 2022. The section 481(a) adjustment is calculated as of January 1, 2022, as follows.

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Accrued income (line 2a) . . . . . . . . . . . . $250,000

Less:

Uncollectible amount . . . . . . . . . . . . . . (50,000)

Net income accrued but not received . . . . $200,000

Less:

Accrued expenses (line 2c) . . . . . . . . . . (75,000)

Expenses deducted as recurring item

(line 2g) . . . . . . . . . . . . . . . . . . . . . (5,000)

Total expenses accrued but not paid . . . . . (80,000)

Section 481(a) adjustment . . . . . . . . . . . . +$120,000

Line 3. Check “Yes” if the applicant is requesting to use the recurring item exception (section 461(h)(3)). The section 481(a) adjustment must include the amount of the additional deduction that results from using the recurring item exception.

Line 5. Check "Yes" if the applicant is requesting a change to the overall cash method or to a method in which a taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method for computing all other items of income and expense under section 15.17 of Rev. Proc. 2022-14 (DCNs 233 and 259). See section 15.17(5)(a) of Rev. Proc. 2022-14 to determine whether an applicant qualifies as a small business taxpayer.

Part II—Change to the Cash Method for Non-Automatic Change Request

Limits on cash method use. Except as provided below, C corporations and partnerships with a C corporation as a partner may not use the cash method. Tax shelters are also precluded from using the cash method. For this purpose, a trust subject to tax on unrelated business income under section 511(b) is treated as a C corporation with respect to its unrelated trade or business activities.

The limit on the use of the cash method under section 448 does not apply to the following.

1. Farming businesses as defined in section 448(d)(1).

2. Qualified personal service corporations as defined in section 448(d)(2).

3. C corporations and partnerships with a C corporation as a partner that meets the section 448(c) gross receipts test for the tax year. The gross receipts test is met if a taxpayer has average annual gross receipts for the 3 prior tax years at or below the inflation-adjusted amount. See Useful Items , earlier, for guidance on the inflation-adjusted amount for the applicable tax year. Also, see section 448(c) and Regulations section 1.448-2(c) to determine if the applicant qualifies for this exception.

For farming corporations and partnerships with a C corporation as a partner, see section 447 for limits on the use of the cash method.

Use of the cash method is also limited for a taxpayer that is required to maintain an inventory because the production, purchase, or sale of merchandise is an income-producing factor. However, see sections 448(c) and 471(c), and sections 15, 17 (DCNs 233 and 259), and 22.18 of Rev. Proc. 2022-14 (DCN 235) for an exception to this requirement for small business taxpayers with average annual gross receipts that meet the gross receipts test.