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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I am trying to figure out the correct method to calculate a

Customer Question

i am trying to figure out the correct method to calculate a 481 adjustment on form 3115 from changing from accrual to tax
Submitted: 1 year ago.
Category: Tax
Expert:  BK-CPA replied 1 year ago.
Hello and thank you for your question. The IRC 481(a) adjustment is calculated with respect to the beginning of year balances as of the change year to prevent duplicating items of income, deduction, etc. It is generally the difference between these items calculated using the new method and the old. Changing from "accrual to tax" as you put it makes no sense unfortunately, but perhaps you are changing from "accrual to cash basis?" Assuming this is what you meant, here is an example: A taxpayer using the accrual method of accounting has $5,000 in receivables and $2,000 in payables as of the beginning of the tax year when a change to the cash method of accounting is made. If the taxpayer records revenue on a cash basis in the current year, then the $5,000 in receivables recognized as revenue in prior years would again be recognized as revenue in the current year when collected, resulting in double taxation. Similarly, if the taxpayer records deductions on a cash basis in the current year, then the $2,000 in payables deducted in prior years would again be deducted in the current year when paid, resulting in double deduction. To avoid these duplications, an IRC 481(a) adjustment is made. The adjustment in this case would be a net decrease to income of $3,000. This is calculated as the difference between accrued receivables under the current cash method, $0, and the old accrual method, $5,000, for a decrease to income of $5,000 netted with the difference between accrued payables under the current cash method, $0, and the old accrual method, ($2,000), for an increase to income of $2,000. The net of the reduction in income for the receivables of $5,000 and the increase in income for the payables of $2,000 is the IRC 481(a) adjustment which is a decrease in income of $3,000.