Schedule D—Change in the Treatment

Part I—Change in Reporting Income From Long-Term Contracts

Line 2a. Under section 460(f), the term “long-term contract” means any contract for the manufacture, building, installation, or construction of property that is not completed in the tax year in which it is entered into. However, a manufacturing contract will not qualify as long term unless the contract involves the manufacture of (a) a unique item not normally included in finished goods inventory, or (b) any item that normally requires more than 12 calendar months to complete.

Long-term contracts that do not meet the exceptions under section 460(e) must be accounted for using the percentage of completion method. See section 460 and the related regulations.

Line 2b. To qualify for the exceptions under section 460(e), the contract must be:

A home construction contract as defined in section 460(e) (5)(A), or
Any other construction contract entered into by the applicant if, at the time the contract is entered into, it is expected to be completed within 2 years and the applicant's average annual gross receipts for the 3-year period preceding the tax year the contract was entered into do not exceed the inflation-adjusted amount. See Useful items , earlier.

Line 2d. Under the simplified cost-to-cost method, only certain costs are used in determining both (a) costs allocated to the contract and incurred before the close of the tax year, and (b) estimated contract costs. These costs are (1) direct material costs; (2) direct labor costs; and (3) allowable deductions for depreciation, amortization, and cost recovery allowances on equipment and facilities directly used to construct or produce the subject matter of the long-term contract. See Regulations section 1.460-5(c).

Part II—Change in Valuing Inventories Including Cost Allocation Changes If the applicant is currently using a LIFO inventory method or submethod and is changing to another LIFO inventory method or

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submethod, Schedule D, Part II, is not applicable. Use Schedule C, Changes Within the LIFO Inventory Method.

Line 3. If an applicant is subject to, but not in compliance with, section 263A, generally on the same Form 3115 the applicant must first comply with section 263A before changing an inventory valuation method. The applicant must complete Schedule D, Part III, Method of Cost Allocation. For exceptions, see Regulations section 1.263A-7(b)(2).

Line 5a. If the applicant properly elected the LIFO inventory method but is unable to furnish a copy of Form(s) 970, Application to Use a LIFO Inventory Method, attach the following statement to Form 3115.

“I certify that to the best of my knowledge and belief [name of applicant] properly elected the LIFO inventory method by filing Form 970 with its return for the tax year(s) ended [insert date(s)] and otherwise complied with the provisions of section 472(d) and Regulations section 1.472-3.”

Line 5c. Attach the two statements required by section 23.01(5) of Rev. Proc. 2022-14.

Line 6 Applicants requesting to make a cost-offset related inventory method change, as defined in section 5.06 of Rev. Proc. 2015-13, as modified by section 4.02 of Rev. Proc. 2021-34, may also be required to make concurrent cost offset changes under Regulations sections 1.451-3 and/or 1.451-8. See the changes under DCN 255 in section 16.10 of Rev. Proc. 2022-14. Applicants making concurrent cost offset changes under Regulations sections 1.451-3 and/or 1.451-8 should also complete Schedule B, line 2. Concurrent changes may need to be implemented in a particular order, and special eligibility rules regarding section 481(a) adjustments may apply. See section 16.10 of Rev. Proc. 2022-14 and section 5.01(1)(g) of Rev. Proc. 2015-13, as modified by section 4.01 of Rev. Proc. 2021-34.

Part III—Method of Cost Allocation Applicants requesting to change their accounting method for any property (produced or acquired for resale) subject to section 263A or any long-term contracts as described in section 460 must complete this schedule.

If the change is for noninventory property that is subject to section 263A, attach a detailed description of the types of property involved.

There are several methods available for allocating and capitalizing costs under section 263A, and for allocating costs to long-term contracts. A change to or from any of these methods is a change in accounting method that requires IRS consent. Using the applicable regulations and notice listed below, the applicant should verify which methods are presently being used and the proposed methods that will be used before completing Schedule D, Part III. These methods are as follows.

1. Allocating Direct and Indirect Costs

Specific identification method—Regulations sections 1.263A-1(f)(2) and 1.460-5.
Burden rate method—Regulations sections 1.263A-1(f)(3)(i) and 1.460-5.
Standard cost method—Regulations sections 1.263A-1(f)(3) (ii) and 1.460-5.
Any other reasonable allocation method—Regulations sections 1.263A-1(f)(4) and 1.460-5.

2. Allocating Mixed Service Costs

Direct reallocation method—Regulations section 1.263A-1(g) (4)(iii)(A).
Step-allocation method—Regulations section 1.263A-1(g)(4) (iii)(B).
Simplified service cost method: —Using the labor-based allocation ratio—Regulations section 1.263A-1(h)(4). —Using the production cost allocation ratio—Regulations section 1.263A-1(h)(5).
Any other reasonable allocation method—Regulations section 1.263A-1(f)(4).

3. Capitalizing Additional Section 263A Costs

Simplified production method: —Without historic absorption ratio election—Regulations section 1.263A-2(b)(3). —With historic absorption ratio election—Regulations section 1.263A-2(b)(4).
Modified simplified production method: —Without historic absorption ratio election—Regulations section 1.263A-2(c)(3). —With historic absorption ratio election—Regulations section 1.263A-2(c)(4).
Simplified resale method: —Without historic absorption ratio election—Regulations section 1.263A-3(d)(3). —With historic absorption ratio election—Regulations section 1.263A-3(d)(4).
U.S. ratio method—Notice 88-104, 1988-2 C.B. 443.
Any other reasonable allocation method—Regulations section 1.263A-1(f)(4) (including the methods listed above under Allocating Direct and Indirect Costs ).