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Yes, we want to change our accounting method for bonus accrual. We previously deducted the amounts accrue in the following year, but now we meet the all-events test and want to deduct the amount paid by 3/15/13 as well. From what I read, this falls under the automatic method change.
2012 accrued bonus amount = 1,240,500; amount of bonus paid by 3/15/13 = 1,137,535. i need help how to calculate the adjustments if you have an example i can follow, and the explanations to the IRS to attach the 3115. Thank you.
Thanks! That clarifies things! This change generally qualifies for automatic consent under Rev. Proc. 2008-52. Moreover, a change in method of accounting generally would provide a taxpayer with audit protection for erroneous accrued bonus amounts in prior years, and allow the taxpayer to spread the unfavorable Section 481(a) adjustment into income ratably over four tax years. Alternatively if the issue is raised and sustained by the IRS, an unfavorable Section 481(a) adjustment generally could be taken into account entirely in the earliest open year.In your situation, you would get a double deduction for the year of change, as you will deduct the amounts accrued in the prior year but paid in the current year, as well as the accrued amounts that will be paid within 2 1/2 months of the year end. The accounting method will not be made retroactively (Rev. Rul. 90-38, 1990-1 C.B. 57) so only the current year will be affected.I don't believe that there will be any deductions requiring an adustment under IRC §481(a), as there are no items that are either duplicated or omitted. So this would just be a straight forward deduction.The explanation on the Form 3115 should be kept as simple as possible to increase the chances of acceptance, and make sure it is automatic. You should say something like "The Taxpayer hereby requests the Commissioner to allow a change in accounting methods from the current accrual method, whereby the Taxpayer was accruing bonuses for financial statement purposes but not deducting them until paid, to the "All Events" method of accounting as allowed under Internal Revenue Code §404, whereby payment of bonuses within 2 1/2 months of the end of the Taxpayer's year are considered paid in that tax year. The Taxpayer is requesting this as an automatic change as allowed under Rev. Proc. 2008-52." I hope this helps! If you have any more questions, please feel free to ask away! If not, and you have found my answer helpful, please rate me highly! I would appreciate it!
Thanks and have a great weekend!
I like your answer about getting the double deduction in 2012 tax year!
In what situation will 481(a) adjustment kick in? When the situation is reversed? i.e., when we were in compliant with the all-event test and now we arent? How do you calculate the 481(a) adjustment in this case?
I misunderstood when I thought that 481(a) adjustment applied to both unfavorable and favorable income/expenses adjustments. You have clarified that 481(a) adjustment is ONLY for unfavorable income/expense adjustment. Thank you for your help.