SECTION 15. METHODS OF — Internal Revenue Bulletin 2019-48

ACCOUNTING (§ 446).

01 Change in overall method from the cash method to an accrual method

(1) Description of change (a) Applicability . This change applies to a taxpayer that wants to change its overall method of accounting from the cash receipts and disbursements method (cash method) (as defined in section 15.01(2)(a) of this revenue procedure) to an accrual method (as defined in section 15.01(2)(b) of this revenue procedure). A change under this section 15. 01 applies to (1) a taxpayer required to make this change by § 448, any other section of the Code or regulations, or in other guidance published in the Internal Revenue Bulletin (IRB), as well as (2) a taxpayer that wants to make this change but is not required to do so by § 448, any other section of the Code or regulations, or in other guidance published in the IRB. A taxpayer changing to an overall accrual method because it is prohibited from using the overall cash method under § 448 may use this section 15. 01 regardless of whether the year of change is the first taxable year that the taxpayer is required by § 448 to change from the cash method (“the first § 448 year”), or is a taxable year other than the taxpayer’s first § 448 year.

Additionally, a taxpayer qualifies to change its overall method of accounting from the cash method to an accrual method using this section 15. 01 even if the taxpayer is also making one or more of the following changes in method of accounting for the same year of change:

(i) adopting the recurring item exception (as defined in section 15.01(2)(c) of this revenue procedure) for one or more types of recurring items ( see § 1. 4615(d)); (ii) adopting or changing to a permissible inventory method of accounting and is

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either adopting this inventory method or qualifies to change to this inventory method using the automatic change procedures of Rev. Proc. 2015-13, 2015-5 I. R. B. 419, and a section of this revenue procedure, or the change can be made automatically under any section of the Code or regulations, or other guidance published in the IRB (see Rev. Rul. 90-38, 1990-1 C. B. 57 (regarding when a taxpayer may adopt a method of accounting));

(iii) adopting or changing to a permissible § 263A method of accounting and is either adopting this § 263A method or qualifies to change to this § 263A method using the automatic change procedures of Rev. Proc. 2015-13 and a section of this revenue procedure, or the change can be made automatically under any section of the Code or regulations, or other guidance published in the IRB (see Rev. Rul. 90-38 (regarding when a taxpayer may adopt a method of accounting)); or

(iv) adopting or changing to any other special method of accounting (as defined in section 15. 01(2)(d) of this revenue procedure) and is either adopting this special method or qualifies to change to this special method using the automatic change procedures of Rev. Proc. 2015-13 and a section of this revenue procedure, or the change can be made automatically under any section of the Code or regulations, or other guidance published in the IRB (see Rev. Rul. 90-38 (regarding when a taxpayer may adopt a method of accounting));

Also, a taxpayer qualifies to use this section 15. 01 when that taxpayer, in the taxable year immediately preceding the year of change, has used a permissible inventory method for that year, and, if that taxpayer was subject to § 263A for that year, has also used a permissible § 263A method for that year, and the method(s) continue to be used for the year of change.

Lastly, a taxpayer with an applicable financial statement (AFS) qualifies to use this section 15. 01 for a taxable year beginning after December 31, 2017, to comply with § 451(b)(1)(A), and, if applicable, § 451(b) (4). However, a taxpayer that wants to make a change for the recognition of income for federal income tax purposes to a method under the New Standards, as defined in section 16. 11(1) of this revenue procedure, for allocating transaction price to performance

obligations for the same year of change must use section 16. 11 of this revenue procedure to make the change for purposes of complying with § 451(b)(4).

(b) Inapplicability . This change does not apply to:

(i) a taxpayer that is making a change from a hybrid method of accounting (as defined in section 15.01(2)(e) of this revenue procedure);

(ii) a taxpayer that is changing its method of accounting for one or more items of income or expense, but not its overall method of accounting. See section 15. 09 of this revenue procedure for a description of accounting method changes from the cash method to an accrual method for specific items that are to be made using the automatic change procedures of Rev. Proc. 2015-13 and that section 15. 09;

(iii) a taxpayer that is required by the Code, regulations, or other guidance published in the IRB to use a special method (for example, an inventory method, a § 263A method, or a long-term contract method) in the year of change and fails to adopt or change to that method;

(iv) a taxpayer that has included in its § 481(a) adjustment any amount of deferred compensation that is described under § 457A(d)(3) that is attributable to services performed before January 1, 2009;

(v) a taxpayer that is engaged in two or more trades or businesses, unless that taxpayer makes this change for each trade or business so that the identical accrual method is used for each trade or business beginning with the year of change;

(vi) a taxpayer that is required by § 447 to change to an accrual method when the year of change is the first taxable year that taxpayer is required by § 447 to change to that method;

(vii) a cooperative organization described in §§ 501(c)(12), 521, or 1381;

(viii) an individual taxpayer, except for activities conducted as a sole proprietorship; or

(ix) a taxpayer with an AFS that wants to make a change for the recognition of income for federal income tax purposes to a method under the New Standards, as defined in section 16.11(1) of this revenue procedure, for allocating transaction price to performance obligations for the same year of change that it wants to change to an accrual method.

(2) Definitions (a) Cash method of accounting is the method identified by § 446(c)(1) and §§ 1. 446-1(c)(1)(i), 1. 451-1(a), and

461-1(a)(1). For purposes of this section
01, the cash method also includes the overall cash method with inventoriable items treated as either inventory or as non-incidental materials and supplies under § 1. 162-3 as permitted by Rev. Proc. 2001-10, 2001-1 C.B. 272, as modified by Rev. Proc. 2011-14, 2011-4 I. R. B. 330, or Rev. Proc. 2002-28, 2002-1 C. B. 815, as modified by Rev. Proc. 2011-14.

(b) Accrual method of accounting is a method identified by § 446(c)(2) and §§

446-1(c)(1)(ii), 1. 451-1(a), and 1. 4611(a)(2). For a taxable year beginning after December 31, 2017, a taxpayer with an AFS treats the all events test with respect to an item of income, or portion of an item of income, as met no later than when the item, or portion of that item, is taken into account as revenue in its AFS.

(d) Special method of accounting within the meaning of this section 15. 01 is a method of accounting, other than the cash method, expressly permitted or required by the Code, regulations, or in other guidance published in the IRB that deviates from the tax accrual accounting rules of §§ 446, 451 and 461 and the regulations thereunder. For example, the installment method of accounting under § 453, the mark-to-market method under § 475, a long-term contract method, and the deferral method of Rev. Proc. 2004-34, 20041 C.B. 991, as clarified and modified by Rev. Proc. 2011-18, 2011-5 I. R. B. 443, and Rev. Proc. 2013-29, 2013-33 I. R. B. 141, and as modified by Rev. Proc. 201114, are special methods of accounting. In contrast, application of the all-events test under a specific set of facts is not a special method of accounting. See, for example, Rev. Rul. 69-314, 1969-1 C. B. 139 (concerning the treatment of retainages).

(e) Hybrid method of accounting is a combination of the cash and accrual methods under which one or more items of income or expense are reported on the cash method and one or more items of income or expense are reported on an accrual method. For purposes of this section

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01, a hybrid method of accounting includes, for example, a taxpayer that uses an accrual method with respect to purchases and sales of inventories and uses the cash method in computing all other items of income and expense.

(3) Manner of making change (a) Section 481(a) adjustment (i) In general . A taxpayer changing its method of accounting under this section 15. 01 must compute a § 481(a) adjustment. This adjustment must reflect the account receivables, account payables, inventory, and any other item determined to be necessary in order to prevent items from being duplicated or omitted. However, the adjustment does not include any item of income accrued but not received that was worthless or partially worthless (within the meaning of § 166(a)) on the last day of the year immediately prior to the year of change.

(ii) Temporary rule for certain S cor- poration revocations . The rules in this section 15. 01(3)(a)(ii) apply to an eligible terminated S corporation, as defined in § 481(d)(2), that changes to an overall accrual method of accounting in the C corporation’s first taxable year after its revocation of its election under § 1362(a), and such revocation occurs during the two-year period beginning on December 22, 2017. (A) Required spread period . Pursuant to § 481(d)(1), an eligible terminated S corporation required to change to an overall accrual method as a result of a revocation of its S corporation election that changes its method of accounting under this section 15. 01 in the C corporation’s first taxable year after such revocation, takes into account the resulting positive or negative adjustment required by § 481(a) (2) ratably during the six-year period beginning with the year of change.

(B) Optional six-year spread period . An eligible terminated S corporation that is permitted to continue to use the overall cash method after the revocation of its S corporation election, and that changes to an overall accrual method under this section 15.01 in the C corporation’s first taxable year after such revocation, may take into account the resulting positive or negative adjustment required by § 481(a) (2) ratably during the six-year period beginning with the year of change instead

of using the adjustment periods provided in section 7. 03(1) of Rev. Proc. 2015-13. An eligible terminated S corporation that wants to use this six-year spread period must indicate in the statement required by Line 26 of Form 3115 (Rev. December 2018) that it is making the change in method of accounting with the spread period permitted under this section 15. 01(3) (a)(ii)(B) on its timely filed Form 3115.

(b) Certain eligibility rules inapplica- ble

(i) Prior change eligibility rule inap- plicable . Any prior change to the overall cash method that the taxpayer implemented using the provisions of Rev. Proc. 2001-10, as modified by Rev. Proc. 201114, or Rev. Proc. 2002-28, as modified by Rev. Proc. 2011-14, is disregarded for purposes of section 5. 01(1)(e) of Rev. Proc. 2015-13. (ii) Certain eligibility rule temporarily inapplicable . For a taxpayer with an AFS that changes to an overall accrual method that complies with § 451(b)(1)(A), and, if applicable, § 451(b)(4) under this section 15. 01, the eligibility rule in section 5. 01(1)(e) of Rev. Proc. 2015-13, 2015-5 I. R. B. 419, does not apply to this change for the taxpayer’s first, second, or third taxable year ending beginning after December 31, 2017.

(c) Adoption of recurring item excep- tion . The taxpayer must attach to its Form 3115 a statement describing the types of liabilities for which the recurring item exception will be used.

(d) Concurrent automatic change to a special method

(i) Generally only one Form 3115 re- quired . Except as provided in section 15. 01(3)(d)(ii) of this revenue procedure, a taxpayer that is changing from the overall cash method to an overall accrual method under this section 15. 01 and changing to a special method, as permitted under section 15. 01(1)(a)(ii), (iii), or (iv) of this revenue procedure, must timely file a single Form 3115 for both changes and must enter the designated automatic accounting method change numbers for both changes on the appropriate line of that Form 3115. For example, a taxpayer making both a change from the overall cash method to an overall accrual method under this section 15. 01 and an automatic change to the deferral method for advance payments under