What is a 481(a) Adjustment?
A 481(a) adjustment is required in order to prevent duplication or omission of income or deductions when the taxpayer has changed their method of accounting, according to the IRS.
Any taxpayer filing changes in their accounting methods needs to file an IRC section 481 (a) adjustment and will need to submit Form 3115. This includes:
- Corporations
- S Corps
- Individuals
- Trusts
- Partnerships
How To Report a 481(a) Adjustment on Tax Return
This requires an IRS Form 3115. This form is also known as the Application for Change in Accounting Method and is required for any taxpayer that either changes their accounting method or revokes or makes certain late elections.
Depending on whether you are filing for an automatic change request or a non-automatic change request will determine the exact information you need to provide.
Completing this form and filing your adjustment can be very complicated. It requires a significant amount of detailed information and detailed calculation based on relevant account balances.
The Form 3115 will ask for the following:
- Personal Name
- Business Name
- Contact Details
- Tax Year Information
- Legal Justification For the Change in Many Situations
- Supporting Information
- Supporting Documents
The purpose of the supporting information is to show entitlement to any section 481(a) adjustment taken into account as part of the change as well as other information that establishes the taxpayer’s eligibility to make the change in accounting method. Not all changes involve a section 481(a) adjustment.
Where Does a 481(a) Adjustment Go On Tax Return?
A taxpayer-favorable, negative section 481(a) adjustment generally goes on the tax return line for “Other Deductions”. A taxpayer-unfavorable, positive section 481(a) adjustment generally goes on the tax return line for “Other Income”. Both may also appear on Schedule M-1 or M-3.
How Source Advisors Can Help
Our team of tax professionals can help you by preparing Form 3115. Specifically, we can help with:
- Determining if Form 3115 should be filed
- Determining if you should file an automatic change request or non-automatic change request
- Assisting your CPA or other tax return preparer with filing Form 3115
- Correcting depreciation methods
- Changing inventory methods
- Assisting with additional matters related to the form and a 481(a) adjustment
- Supporting Documents
