Accounting Methods Changes

Benefit:

  • May improve cash flow through reduction of income tax obligations
  • Enhanced benefit likely as organization grows
  • May present a more accurate and consistent view of an organization’s taxable income
  • May adapt to an existing or new IRS regulatory requirement

Who’s most likely to benefit:

  • Organizations which:
    • Have experienced dramatic changes (mergers, acquisitions, restructuring, etc.)
    • Have experienced dramatic growth
    • Are subject to a switch in regulatory requirements

Description:

Accounting methods are prescribed ways of reporting an organization’s income and expenses, using tax methods that clearly and consistently reflect income. Once an organization adopts a particular accounting method, it must ordinarily continue to use that method unless a request to change methods is filed with the IRS, or the change is eligible for automatic IRS consent.

Accounting method changes are most commonly related to how (and when) an organization reports its revenue and expenses (i.e., cash vs. accrual), how inventory is valued (i.e., LIFO vs. FIFO or other hybrid methods), or how depreciation is calculated. Accounting method changes in which tax code clarifications have delivered the opportunity for significant benefit include prepaid expenses, recurring-item exception for expenses, and advance payments regarding income inclusion or exclusion.

An AGH tax professional can evaluate your organization and the types of accounting methods currently in use, as well as your environment and goals and regulatory requirements that may apply to you. The professional will then outline any proposed accounting method changes and the pros and cons of each, as well as help you file for IRS consent to an accounting method change (if necessary) and provide support in implementing the change within your organization.