Small, medium-sized, and large businesses in the US file their tax returns with the IRS. However, when they change their accounting methods, they need to file the changes using Form 3115. The form offers various accounting methods for businesses to choose from and specific rules on how to fill the form.
What Is a Form 3115?
Form 3115 is an application to the IRS for an automatic change in accounting methods. Also called the application for change in accounting method, businesses in the US file to change the accounting treatment of any item. For example, accelerating depreciation, changing inventory reporting, or switching to an accrual method.
In 2019, the IRS released a revised edition of Form 3115. The new form reflects changes introduced by recent tax legislation. Notable changes to Form 3115 involve Schedules A and B. The IRS also released Form 3115 instructions.
Form 3115 Instructions
The following are Form 3115 instructions after the 2019 revision. First, under the automatic change procedures, businesses are eligible to file for the requested year of change.
Second, the IRS will review all Form 3115 filed under these procedures. After the IRS reviews the form, they will notify you in addition to that requested on Form 3115. Finally, the IRS will grant consent to change an accounting method for applicants who timely file Form 3115. Applicants should also comply with the automatic change procedures.
Third, for each change of accounting method, the IRS requires you to file a separate Form 3115. However, in some circumstances, the IRS permits filing a single Form 3115 for concurrent changes in the method of accounting.
Fourth, a small taxpayer qualifies for a reduced Form 3115 filing requirements. According to the IRS, a qualified small taxpayer has annual gross receipts equal to or less than $10 million. Under the reduced Form 3115 requirements, a small taxpayer must complete only certain lines and schedules in the form.
Lastly, if you do not qualify to file under the automatic changes procedures, you can file under non-automatic change procedures. Make sure to file a separate Form 3115 for every submethod.
As a business, you can choose to change your accounting method after filing your first business income tax return. Changes in accounting methods require approval from the IRS.
These methods include switching from a cash basis to an accrual basis method or switching from an accrual basis to a cash basis method. Once you receive an official “OK” from the IRS, you can make a change in the method used to value your inventory.
Changes in amortization or depreciation methods also require approval from the IRS. However, some changes are usually permitted without special permission from the IRS. If unsure, consult a business tax professional.
You can choose to file Form 3115 in duplicate. All you need to do is attach the original form to your income tax return. You will also need to file a copy of the form with the IRS National Office. To file Form 3115, open the return and complete screens under the Change in the Accounting method section.
You must provide lots of information about you and your business. Such information includes:
ᐅ ID number
ᐅ Applicant type
ᐅ Phone number
ᐅ Tax year information
ᐅ Accounting details
You must also attach several supporting documents. They include your business’s balance sheets and income statements. These documents should be from the previous year. The final attachment should be a statement that specifies the accounting method used when preparing the sheets.
If filing electronically, the system will attach your Form 3115 as an electronic file.
You don’t need to sign the original Form 3115. But you must submit two copies of Form 3115 to the IRS. However, if you use a tax preparer, they’re required to sign Form 3115 and provide their Preparer Tax Identification Number. Remember, never sign a blank return. This poses a significant financial risk for you and your business.
You need to file Form 3115 after the first day of the year of the change. While there are specific deadlines on the form, the earlier you file, the more time the IRS will have to resolve any issues.
If you discover that you entered incorrect information or forgot to include something, you can amend Form 3115. Unfortunately, amending the form is a complicated process. You need the help of a professional tax preparer.
The IRS requires all taxpayers to fill all back tax returns for years not yet filed. In addition, the IRS requires you to file the last six years of tax returns to be in good standing.
For non-automatic Form 3115, the user fee increased from $9,500 to $10,800. In addition, the fee for identical changes in accounting method increased from $200 to $230 per applicant.
Under the recent revisions, an eligible BBA partnership can file a Form 3115.
Form 3115 is a quick way for businesses to make changes to accounting methods. However, taxpayers are usually hindered by the five-year rule. While taxpayers can file Form 3115 for different accounting changes, five years must elapse before filing a second 3115.
To ensure the successful filing of Form 3115, we recommend choosing the right tax professional for your business. When looking for the right tax professional, make sure they have a valid PTIN. Also, take your time to compare fees with multiple professionals.