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taxmanrog, can you help fill out form 3115 for automatic method

change for bonus? we changed...
taxmanrog, can you help fill out form 3115 for automatic method change for bonus? we changed from accrual to 2.5 months paid. i need help how to calculate the adjustments if you have an example i can follow, and the explanations to the IRS
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7/28/2013
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 879
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Welcome to Just Answers! Thanks for asking for me! I will do my best to answer your questions.

Are you talking about changing your method of accounting to deducting expenses only when the "all events" test under IRC §404? This usually applies to bonuses and accrued compensation. Is this what you are looking for?

Please let me know, as well as the amount of current accrual you have deducted but not yet paid within 75 days from the end of the year.

Thanks! I look forward to your reply!

Roger
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Customer reply replied 4 years ago


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!

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Customer reply replied 4 years ago

I like your answer about getting the double deduction in 2012 tax year! Smile


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?

Usually you see §481(a) adjustments kick in when the change in accounting method requires you to recognize additional income. The IRS doesn't want you to avoid making a change that should be made just because you don't want to take the tax hit all in one year. They allow you to spread the additional income out equally over a 4 year period. For example, I had a client who came to me from another accountant. This Taxpayer was a retail establishment, and a C corporation, and the prior accountant set him up as a cash basis taxpayer for filing his tax return. He kept his books on the accrual method, which was GAAP. This was wrong for two reasons. First, any entity with inventory is generally required to use the accrual method of accounting. Second, C-Corporations are required to use the accrual method of accounting.

This particular taxpayer had very few payables but over $150k of accounts receivable. We changed him to the accrual basis of accounting, which required him to recognize as income the $150k of Accounts Receivable. We were allowed to take this into income over a 4 year period, at $37.5k per year. That is the usual type of §481 adjustment.

In your situation, you are considered to have met the all-events test if you accrue the bonus and actually pay it by the end of the 2 1/2 month period.

Thanks for this question! It was a pretty good one! If this has raised any more questions, please let me know. If not, don't forget to rate me if you feel I helped! I always appreciate that!

Thanks!

Roger
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Customer reply replied 4 years ago

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.

That is correct! IRC §481(b)(1)(B) states that if the method of accounting results in an increase in taxable income for the year, then it must be adjusted. It also states (in §481(a)(2)) that adjustments are only necessary to prevent items from being duplicated or omitted. In this case, there is no duplication or omission, therefore no adjustment.

If you have any more questions, please let me know! It has been a pleasure working with you!
taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 879
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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