Accounting Methods

An accounting method is a practice a taxpayer follows to determine the year in which to report revenue and expenses for federal income tax purposes. An accounting method includes not only the overall plan of accounting for gross income or deductions (for example, an accrual method or the cash receipts and disbursement method), but also the treatment of an item used in such overall plan. However, a practice that does not affect the timing for reporting an item of income or deduction for purposes of determining taxable income is not an accounting method. A taxpayer, including a tax-exempt entity, adopts any permissible accounting method in the first year in which it uses the method in determining its taxable income. See Rev. Proc. 2015-13, 2015-5 I.R.B. 419 as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, section 9 of Rev. Proc. 2025-1, 2025-1 I.R.B. 1, and any successors.

Caution: An exempt organization may adopt an accounting method not only for purposes of calculating taxable income, but also for purposes of determining whether taxable income will be subject to federal income tax. For example, a tax-exempt entity may adopt an accounting method for an item of income from an unrelated trade or business activity even if the gross income from the activity is less than $1,000 and is therefore not taxed for federal income tax purposes pursuant to Regulations section 1.6012-2(e).

An accounting method for an item of income or deduction may generally be adopted separately for each of the taxpayer’s trades or businesses. However, in order to be permissible, an accounting method must clearly reflect the taxpayer’s income. Unless instructed otherwise, the organization should generally use the same accounting method on the Form 990-T and all schedules to report revenue and expenses that it regularly uses to keep its books and records.

Accounting method change. Once a taxpayer, including a tax-exempt entity, adopts an accounting method for federal income tax purposes, the taxpayer must generally request the IRS consent before it can change its accounting method (even if the year in which the taxpayer seeks to make the change is a year in which it generates only tax-exempt income or is otherwise not taxed on its taxable income). In most cases, a taxpayer requests consent to change an accounting method by filing Form 3115, Application for Change in Accounting Method. See Rev. Proc. 2015-13, or any successor, for general procedures for obtaining consent to change an accounting method. See the Instructions for Form 3115

and Pub. 538 for more information and exceptions. See Rev. Proc. 2021-34 for additional procedures that may apply for obtaining automatic consent to change methods of accounting for revenue recognition and certain other methods of accounting that may affect the accounting for revenue recognition. Also, see Rev. Proc. 2022-09 for additional procedures that may apply for obtaining automatic consent to change certain methods of accounting related to small businesses.

Depending on the specific accounting method change being requested, the taxpayer may be able to request automatic consent. This means that, as long as the taxpayer follows the applicable procedures, the taxpayer does not have to wait for formal approval by the IRS before applying the new accounting method. See Rev. Proc. 2022-14, 2022-7 I.R.B. 502 available at IRS.gov/irb/ 2022-07_IRB#REV-PROC-2022-14 , for the list of automatic changes for 2022; as modified by Rev. Proc. 2022-23; 2022-18 I.R.B. 1052, available at IRS.gov/irb/ 2022-18_IRB#REV-PROC-2022-23 , which provides guidance allowing late elections under sections 168(j)(8) and 168(l)(3)(D), and a late election under section 181(a) (1), for a list of accounting method changes that may qualify for automatic consent.

For example, a tax-exempt entity that has adopted an accounting method for an item of income from an unrelated trade or business must generally request consent before it can change its method of accounting for that item in any subsequent year. This is true regardless of whether gross income from the unrelated trade or business is $1,000 or more in such subsequent year.

Alternatively, if a taxpayer, including a tax-exempt entity, has not yet adopted an accounting method for an item of income or deduction, a change in how the entity reports the item isn’t a change in accounting method. In this case, the procedures applicable to requests for accounting method changes (for example, the requirement to file Form 3115) are not applicable. See Rev. Proc. 2015-13 for the definition of what constitutes an accounting method change.

Thus, a tax-exempt entity that has never taken into account an item of income or deduction in determining taxable income does not have to request consent to change its method of reporting that item on its Form 990-T. Additionally, a tax-exempt entity that has never been subject to federal income tax on an item of income or deduction, but that is required to file a Form 990-T solely due to owing a section 6033(e)(2) proxy tax, does not have to request consent to change its method for reporting the item.

Adjustments required when changing an accounting method. A taxpayer, including a tax-exempt entity, that changes its accounting method must generally calculate and report an adjustment to ensure that no portion of the item being changed is permanently omitted or duplicated (see section 481(a)). However, depending on the specific method change, the IRS may provide that an adjustment isn’t required or permitted.

Caution: Generally, a taxpayer, including a tax-exempt entity, will recognize a positive section 481(a) adjustment (that is, an increase to income) ratably over 4 tax years

Instructions for Form 990-T (2025) 9

and will recognize a negative section 481(a) adjustment in full in the year of change. See Rev. Proc. 2015-13 or its successor.

An organization may elect a 1-year adjustment period for a positive section 481(a) adjustment that is less than $50,000. See the Instructions for Form 3115 for more information and the requirements to make this election.

Include any positive section 481(a) adjustment on Schedule A (Form 990-T), Part I, line 12 (Other income). If the section 481(a) adjustment is negative, report it as a deduction on Schedule A (Form 990-T), Part II, line 14 (Other deductions). The section 481(a) adjustment should not be reported on Form 990-T as a negative number.

However, as discussed above, if a tax-exempt entity has not yet adopted an accounting method for an item, a change in how the entity reports the item for purposes of filing the Form 990-T is not a change in accounting method. In this case, an adjustment under section 481(a) isn’t required or permitted.