481 a Adjustment For Changes in Accounting Methods

What is a 481 a Adjustment?

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:

How Will The Recent Changes To Section 174 Impact Tax Liability?​

Taxpayers with R&E expenditures and or software development costs will no longer be able to deduct those costs in the year incurred but will be required to amortize them over no less than 5 years.  Section 174 was amended by the Tax Cuts and Jobs Act (TCJA) to require amortization of R&E expenditures paid or incurred for tax years beginning after December 31, 2021. For those tax years beginning after December 31, 2021, Section 174 will require taxpayers to amortize specific R&E expenditures over a period of five years for costs attributable to domestic research, or a period of 15 years for costs attributable to foreign research. Also, all software development costs are now automatically treated as R&E expenditures and must be amortized in accordance with the recent changes.   

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 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 with Your 481(a) Adjustment

For the services Source Advisors provides, such as 481(a) adjustments, cost segregation, LIFO, UNICAP, and 179D, our team of tax professionals can help you by preparing Form 3115. Specifically, we can help with:

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