SECTION 5. COMPUTATION OF

SECTION 481(a) ADJUSTMENT

.01 In general . A taxpayer changing to a method of accounting provided in the final regulations under this revenue procedure is required to take into account any applicable § 481(a) adjustment as provided in §§ 1.263(a)–4(p)(3) and 1.263(a)–5(n)(3). The § 481(a) adjustment is computed as of the first day of the taxpayer’s taxable year of change and, as provided in the final regulations, takes into account only amounts paid or incurred in taxable years ending on or after January 24, 2002. Thus, the § 481(a) adjustment is computed by taking into account only amounts paid or incurred in the period beginning with the first day of the taxable year that includes January 24, 2002, and ending with the last day of the last taxable year prior to the year of change. The amount of the § 481(a) adjustment must include (i) as a reduction of taxable income, any amounts paid or incurred in the period beginning with the first day of the taxable year that includes January 24, 2002, and ending with the last day of the taxable year prior to the taxable year of change, that were capitalized under the taxpayer’s present method of accounting and are currently deductible under the taxpayer’s proposed method of accounting, reduced by the amount of such capitalized costs recovered through amortization or depreciation under the taxpayer’s present method of accounting, (ii) as an increase to taxable income, any amounts paid or incurred in the period beginning with the first day of the taxable year that includes January 24, 2002, and ending with the last day of the taxable year prior to the taxable year of change, that were currently deducted under the taxpayer’s present method of accounting and are capitalized under the taxpayer’s

January 17, 2006 313 2006–3 I.R.B.