Automatic change procedures.

Unless otherwise provided in published guidance, you must file under the automatic change procedures if you are eligible to request consent to make an accounting method change under the automatic change procedures for the requested year of change. See the instructions for Part I Information for Automatic Change Request, later, and the List of Automatic Changes in Rev. Proc. 2022-14.

No user fee is required for a Form 3115 filed under the automatic change procedures. An applicant that timely files and complies with the automatic change procedures is granted consent to change its accounting method, subject to review by the IRS National Office and operating division director. If it is reviewed by the IRS, you will be notified if information in addition to that requested on Form 3115 is required or if your request is denied. Ordinarily, you are required to file a separate Form 3115 for each accounting method change. However, in some cases, you are required or permitted to file a single Form 3115 for particular concurrent accounting method changes. See section 6.03(1)(b) of Rev. Proc. 2015-13 for more information.

Non-automatic change procedures.

If you do not qualify to file under the automatic change procedures for the requested accounting method change for the requested year of change, you may be able to file under the non-automatic change procedures. See Non-automatic change-scope and eligiblity rules , under Part III, later. If the requested change is approved by the IRS National Office, the filer will receive a letter ruling on the requested change. File a separate Form 3115 for each unrelated item or submethod that is being changed. A user fee is required. See the instructions for Part III for more information.

Automatic change requests.

Except if instructed differently, you must file Form 3115 under the automatic change procedures in duplicate as follows.

The IRS does not send acknowledgements of receipt for automatic change requests.

For filing procedures relating to automatic change requests for certain foreign corporations and foreign partnerships, see section 6.03(1)(a)(ii) and (iii) of Rev. Proc. 2015-13.

Non-automatic change requests.

You must file Form 3115 under the non-automatic change procedures during the tax year for which the change is requested, unless otherwise provided by published guidance. See section 6.03(2) of Rev. Proc. 2015-13. File Form 3115 with the IRS National Office at the address listed in the Address Chart for Form 3115 below. Alternatively, Form 3115 may be submitted by secure electronic facsimile or encrypted electronic mail. File Form 3115 as early as possible during the year of change to provide adequate time for the IRS to respond prior to the due date of the filer's return for the year of change.

Rev. Proc. 2023-1.

See Rev. Proc. 2023-1. This revenue procedure provides specific and additional procedures for requesting an accounting method change, including the user fee for non-automatic method of change requests.

Rev. Proc. 2015-13.

See Rev. Proc. 2015-13. This revenue procedure provides the automatic and non-automatic method change procedures to obtain consent of the IRS to change an accounting method.

Rev. Proc. 2022-14.

See Rev. Proc. 2022-14. This revenue procedure contains a list of accounting method changes that may be eligible to file under the automatic method change procedures.

Inflation-adjusted amount.

Certain automatic accounting method changes require that the applicant’s average annual gross receipts for the 3 preceding tax years be at or less than the “inflation-adjusted amount” (set forth in an annual revenue procedure) See, for example, DCN 22. For years beginning in 2022, the inflation adjusted amount is $27,000,000. See Rev. Proc. 2021-45.

Pub. 538, Accounting Periods and Methods.

This publication provides general information on accounting methods.

Individuals.

If Form 3115 is filed for a couple who file a joint income tax return, enter the names of both spouses on the first line and the signatures of both spouses on the signature line.

Partnerships.

Enter the name of the partnership on the first line of Form 3115. In the signature section, include the signature of one of the general partners or LLC members who has personal knowledge of the facts and who is authorized to sign. Enter that person's name and official title in the space provided. If the authorized partner is a member of a consolidated group, then an authorized officer of the common parent corporation with personal knowledge of the facts must sign.

Non-consolidated corporations, personal service corporations, S corporations, and cooperatives.

Enter the name of the filer on the first line of Form 3115. In the signature section, enter the signature of the officer who has personal knowledge of the facts and authority to bind the filer in the matter. Enter that officer's name and official title in the space provided.

Consolidated group of corporations.

Enter the name of the common parent corporation on the first line of Form 3115. Also enter the name(s) of the applicant(s) on the fourth line if a member of the consolidated group other than, or in addition to, the parent corporation is requesting an accounting method change. In the signature section, enter the signature of the officer of the common parent corporation who has personal knowledge of the facts and authority to bind the common parent corporation in the matter, and that officer's name and official title in the space provided.

Multiple entities with a common sponsor.

Enter the name of the common sponsor on the first line of Form 3115. Enter on the fourth line the name of each entity with the common sponsor that is requesting an accounting method change. In the signature section, enter the signature of the officer who has personal knowledge of the facts and authority to bind the common sponsor and the applicants with that common sponsor in the matter, and that officer’s name and official title in the space provided.

Separate and distinct trade or business of an entity.

Enter the name of the entity (or common parent corporation if the entity is a member of a consolidated group) on the first line of Form 3115. Also enter the name of the separate and distinct trade or business requesting an accounting method change on the fourth line. In the signature section, enter the signature of the individual who has personal knowledge of the facts and authority to bind the separate and distinct trade or business of the entity in the matter, and that person's name and official title in the space provided.

CFC or 10/50 corporation.

For a CFC or 10/50 corporation with a U.S. trade or business, enter the name of the designated (controlling domestic) shareholder that retains the jointly executed consent as provided for in Regulations section 1.964-1(c)(3)(ii) (or, if the designated shareholder is a member of a consolidated group, the common parent corporation) on the first line of Form 3115. Enter the name of the CFC or 10/50 corporation on the fourth line of Form 3115. In addition, a Form 3115 filed on behalf of the CFC or 10/50 corporation by its controlling domestic shareholder(s) (or the common parent) must be signed by an authorized officer of the designated (controlling domestic) shareholder (or the common parent). If there is more than one shareholder, the statement described in Regulations section 1.964-1(c)(3)(ii) must be attached to the application. Also, the controlling domestic shareholder(s) must provide the written notice required by Regulations section 1.964-1(c)(3)(iii).

Estates or trusts.

Enter the name of the estate or trust on the first line of Form 3115. In the signature section, enter the signature of the fiduciary, personal representative, executor, administrator, etc., who has personal knowledge of the facts and legal authority to bind the estate or trust in the matter, and that person's official title in the space provided.

Exempt organizations.

Enter the name of the organization on the first line of Form 3115. In the signature section, enter the signature of a principal officer or other person who has personal knowledge of the facts and authority to bind the exempt organization in the matter, and that person's name and official title in the space provided.

Preparer (other than filer/applicant).

If the individual preparing Form 3115 is not the filer or applicant, the preparer must also sign, and include the firm's name, where applicable. Generally, for both automatic and non-automatic changes, the preparer (if not the filer or applicant) must sign the original and copies of Form 3115. If Form 3115 is e-filed, the preparer need not sign the original e-filed Form 3115 but must still complete the preparer information and, if applicable, must sign the duplicate automatic Form 3115 copy.

Line 4.

If no, check “No.” If yes, check “Yes” and attach a statement explaining why the applicant is eligible to change its accounting method. For example, specific guidance may permit an applicant to change its method of accounting in its final tax year. See section 5.03(2) of Rev. Proc. 2015-13 and sections 6.01 (DCN 7) and 6.07 (DCN 107) of Rev. Proc. 2022-14, or any successor.

Ordinarily, the IRS will not consent to a request for an accounting method change when an applicant ceases to engage in the trade or business or terminates its existence. Generally, an applicant is considered to cease to engage in a trade or business if the applicant terminates its existence for federal income tax purposes, ceases operation of the trade or business, or transfers substantially all the assets of the trade to another taxpayer. For example, a cessation of a trade or business occurs when a trade or business is incorporated or the assets of the trade or business are contributed to a partnership. See sections 3.04, 5.01, and 5.03 of Rev. Proc. 2015-13.

Line 5.

When an acquiring corporation operates the trades or businesses of the parties as separate and distinct trades or businesses after the date of distribution or transfer, the acquiring corporation must use a carryover method. See Regulations sections 1.381(c)(4)-1(a)(2) and 1.381(c)(5)-1(a)(2). On the other hand, when the acquiring corporation does not operate the trades or businesses of the parties as separate and distinct trades or businesses after the date of distribution or transfer, the acquiring corporation will generally use the principal method. The applicant does not need to secure the Commissioner's consent to use the principal method. See Regulations sections 1.381(c)(4)-1(d)(1) and 1.381(c)(5)-1(d)(1).

Line 6a.

Generally, the applicant is under examination with respect to a federal income tax return as of the date the applicant (or filer) is contacted in any manner by a representative of the IRS for the purpose of scheduling or conducting any type of examination of the return. See section 3.18 of Rev. Proc. 2015-13.

Line 6b.

Generally, the applicant's accounting method is an issue under consideration if the examining agent has given the applicant (or filer) written notification specifically citing the treatment of the item as an issue under consideration. If an examining agent does not propose an adjustment for the item that is an issue under consideration during the examination, the item continues to be an issue under consideration after the examination ends only if the issue is placed in suspense. The applicant's accounting method is an issue placed in suspense if the examining agent has given the applicant (or filer) written notification of the IRS's intent to examine the issue during the examination of the subsequent tax year(s) to be examined. See section 3.08 of Rev. Proc. 2015-13. A partnership or an S corporation has an issue under consideration before examination if the same item is an issue under consideration in an examination of a partner’s, member’s, or shareholder's federal income tax return. For consolidated groups, see section 3.08 of Rev. Proc. 2015-13 for issue under consideration rules.

For CFCs and 10/50 corporations, the issue under consideration rules are different. See section 3.08(4) of Rev. Proc. 2015-13.

Lines 6c and 6d.

If you answered “Yes” to line 6a, include the name and telephone number of the examining agent, and the tax year(s) under examination in the designated places on line 6c. For any present or former consolidated groups, if there is a tax year under examination, complete the information on line 6c. Provide a copy of Form 3115 to the examining agent no later than the date the filer timely files Form 3115. See section 6.03(3)(a) of Rev. Proc. 2015-13.

Line 7a.

In general, audit protection applies when an application for change in accounting method is granted. See section 8.01 of Rev. Proc. 2015-13. For exceptions where audit protection is not provided, see section 8.02 of Rev. Proc. 2015-13. You should answer “Yes” even if you do not receive audit protection when the change is granted but might receive it at the end of the exam under section 8.02(1)(f) of Rev. Proc. 2015-13. For example, a change made under DCN 17 for an applicant that wants to change its treatment of research and experimental expenditures does not receive audit protection. See the List of Automatic Changes for additional method changes not subject to audit protection. If you are making a change on behalf of one or more applicants that are CFCs or 10/50 corporations and audit protection is unavailable for any such applicants for one or more years due to the application of section 8.02(5) of Rev. Proc. 2015-13, you should check “No” and attach an explanation stating the applicants and the years for which there is no audit protection under section 8.02(5).

If no audit protection is given for the requested change, check “No” and attach an explanation. For example, if you are making a change under DCN 17, your explanation is DCN 17. If you are making a change under DCN 7, your explanation could be that none of the items on line 7b apply. If multiple items are being changed on one Form 3115 and at least one item has audit protection and another item does not have audit protection, check both “Yes” and “No.”

Line 7b.

Generally, the applicant receives audit protection for tax years prior to the year of change if they fall into one of the following categories listed below. If Form 3115 is being filed on behalf of multiple applicants or if multiple items are being changed on one Form 3115, check all that apply and attach a statement identifying which category applies to which applicant or item. Except for “Not under exam” and “Other,” the following only apply to applicants under examination.

Line 8a.

If you answered “Yes,” complete lines 8b–d.

Line 8b.

To determine if the applicant’s accounting method is an issue under consideration by Appeals and/or a federal court, see sections 3.08(2) and 3.08(3) of Rev. Proc. 2015-13.

Line 8c.

If you answered “Yes” to line 8a, include the name and telephone number of the Appeals officer(s) and/or counsel to the government, as well as the tax year(s) before Appeals and/or federal court in the designated places.

Line 8d.

If you answered “Yes” for line 8a, provide a copy of the signed Form 3115 to the Appeals officer(s) and/or all counsel to the government, as applicable, no later than the date the filer timely files Form 3115. See section 6.03(3)(a) of Rev. Proc. 2015-13.

Line 9.

If you answered “Yes” to line 6a or 8a, complete line 9. The information requested on line 9 should be included on a separate attachment.

Line 10.

If you answered “Yes,” attach an explanation. Unless otherwise provided, the applicant does not receive audit protection for the requested change if it is an issue under consideration. See sections 3.08 and 8.02(7) of Rev. Proc. 2015-13.

Lines 11a–c.

Unless otherwise provided, an applicant is not eligible to file under the automatic change procedures if the applicant made or requested a prior overall method change or a prior item change (for the same item) within the 5 tax years ending with the requested year of change. For additional details, see section 9.03(6)(a) of Rev. Proc. 2023-1 and section 11.02(2) of Rev. Proc. 2015-13.

Line 12.

For further details, see section 9.03(6)(b) of Rev. Proc. 2022-1.

Line 13.

If you answered “Yes,” complete Schedule A of Form 3115. For example, an overall accounting method change includes a change from an accrual method to the cash receipts and disbursements method or vice versa. See section 446(c).

Line 14.

Provide the information requested on lines 14a–d if the applicant answered “No” to question 13 or if the applicant answered “Yes” to question 13 and is also changing to a special accounting method for one or more items.

With the information requested on line 14b, the applicant is also required to provide a statement of whether or not the applicant has claimed any federal tax credit, grant, or subsidy relating to the item(s) being changed (for example, the employee retention credit for a change in method related to payroll taxes). A special accounting method for an item is an accounting method (other than the cash method or an accrual method) expressly permitted by the Code, regulations, or guidance published in the I.R.B. that deviates from the rules of sections 446, 451, and 461 (and the related regulations) that is applicable to the applicant's overall accounting method (proposed overall method if being changed). For example, the installment accounting method under section 453, the mark-to-market method under section 475, and the long-term contract method under section 460 are special methods of accounting. See section 15.01(2)(d) of Rev. Proc. 2022-14.

Lines 15a and 15b.

Provide the requested information for each applicant. For guidance on using different methods of accounting for each trade or business, see section 446(d).

An applicant may include each member of a consolidated group, each wholly owned partnership within a consolidated group, each separate and distinct trade or business of each member of a consolidated group or other entity (even if the change is for all of a member's or other entity's trades or businesses), and each eligible CFC or 10/50 corporation filing a single Form 3115 requesting the identical accounting method change. Also see Who Must File , earlier.

Lines 16a–c.

For non-automatic changes, the applicant is required to provide a full explanation of the legal basis to support the proposed method, including all authorities supporting the proposed method, and a discussion of all contrary authorities. For further details on what is to be included, see Rev. Proc. 2023-1, sections 7.01(9) (statement of supporting authorities), 9.03(1) (facts and other information), 9.03(2) (statement of contrary authorities), 9.03(4) (analysis of material facts), and 9.03(7) (statement identifying pending legislation).

For the following automatic method changes, the applicant is only required to complete lines 16a–b, unless the information on lines 16a–b is otherwise provided in the applicable Form 3115 Schedules A–E: DCNs 6, 7, 28, 54, 55, 64, 65, 108, 111, 114, 127, 194, and 200 (only for changes listed in sections 6.12(3)(a)(ix), 6.12(3)(a)(x), and 6.12(3)(b)(viii) in the List of Automatic Changes; 205 (only for changes listed in sections 6.13(3)(h) and 6.13(3)(j) in the List of Automatic Changes); 206 (only for changes listed in sections 6.14(3)(a), 6.14(3)(h), and 6.14(3)(j) in the List of Automatic Changes; 207 (only for changes listed in sections 6.15(3)(a) and 6.15(3)(d) in the List of Automatic Changes); 211, 218, 231, 237, 241, 242, 250, 251, 252, 253, 254, 255, and 256. Line 16c does not need to be completed for applicants filing automatic method changes. For further details on what is to be included, see Rev. Proc. 2023-1, sections 7.01(9) (statement of supporting authorities), 9.03(1) (facts and other information), and 9.03(4) (analysis of material facts).

If the automatic DCN is not specifically listed in the paragraph above, or subsequent guidance released after the issuance of these instructions, skip lines 16a–c.

Line 17.

Insurance companies must also attach a statement indicating whether the proposed accounting method will be used for annual statement accounting purposes.

Line 18.

For details on requesting and scheduling a conference, see sections 9.04(4) and 10 of Rev. Proc. 2023-1.

Lines 19a and 19b.

For certain automatic method changes, the applicant must demonstrate that it meets the gross receipts test under section 448(c) to qualify for the change. This gross receipts test is met if a taxpayer has average annual gross receipts for the 3 prior tax years at or below the inflation-adjusted amount. See Useful Items earlier, for guidance on the inflation-adjusted amounts.

For the calculation of gross receipts for an overall accounting method change request, whether an applicant qualifies as a small business taxpayer for purposes of applying sections 263A and 471, or whether an applicant qualifies as an eligible small business under section 474(c), see section 448(c) and Regulations section 1.448-2(c), and, as applicable, Regulations section 1.263A-1(b)(1)(j) or Regulations section 1.471-1(a)(2).

For the calculation of gross receipts for determining whether the applicant has an exempt construction contract under Regulations section 1.460-3(b), for contracts entered into after December 31, 2017, in tax years ending after December 31, 2017, see section 448(c) and Regulations sections 1.448-2(c) and 1.460-3(b)(3).

Non-automatic change—scope and eligibility rules.

An applicant may not use the non-automatic change procedures if any of the following eligibility limitations apply at the time Form 3115 is filed with the IRS National Office.

Line 20.

If you answered “Yes,” attach an explanation describing why the applicant is not eligible to file a request under the automatic change procedures.

Line 21.

Attach true copies of all contracts, agreements, and other documents directly related to the proposed accounting method change. See section 9.03(3) of Rev. Proc. 2023-1.

Line 22.

Include a statement explaining the reason for the proposed change. See sections 7.01(1)(d) and 9.03(1) of Rev. Proc. 2023-1.

Line 23.

If you answered “No” to line 23, a common parent requesting an accounting method change on behalf of a member of the consolidated group must attach a statement explaining the accounting method used by each member of the consolidated group for the particular item that is the subject of the method change request. See section 6.02(5) of Rev. Proc. 2015-13.

Lines 24a and 24b.

For non-automatic change requests, you must pay a user fee for each applicant. Where the filer is not an applicant, a fee is not required for the filer. See section 15 and Appendix A of Rev. Proc. 2023-1 for information regarding user fees, including reduced user fees and user fees for additional applicants filing identical changes in methods of accounting.

Pay the user fees through PAY.gov.

Line 25.

Ordinarily, an adjustment under section 481(a) is required for accounting method changes. The section 481(a) adjustment period is generally 1 tax year (year of change) for a negative section 481(a) adjustment and 4 tax years (year of change and next 3 tax years) for a positive section 481(a) adjustment. However, when an applicant is under examination, the section 481(a) adjustment period is 2 tax years (year of change and next tax year) for a positive section 481(a) adjustment for a requested accounting method change unless one of the following categories described on line 7b applies: 3-month window, 120-day window period, method not before the director, or CAP.

For some accounting method changes, there may be special rules relating to the section 481(a) adjustment period. See, for example, section 16.10(4)(b)(iv)(D) of Rev. Proc. 2022-14 pertaining to certain section 451 cost offset accounting method changes resulting from concurrent cost-offset related inventory method changes.

Also, for certain accounting method changes, the applicant must make the change on a cut-off basis or modified cut-off basis. See, for example, Regulations section 1.446-1(e)(2)(ii)(d)(5)(iii). In those cases, there is no section 481(a) adjustment. Under a cut-off basis, only the items arising on or after the beginning of the year of change are accounted for under the new method of accounting. Any items arising before the year of change continue to be accounted for under the applicant's former accounting method.

For a change in accounting method for accruing a foreign income tax expense, do not compute a section 481(a) adjustment. Instead, apply the modified cut-off rules in Regulations section 1.905-1(d)(5). Attach a statement showing, for each separate statutory or residual grouping, the upward and downward adjustment (accounted for in the currency in which the foreign tax liability is denominated) that is required by Regulations section 1.905-1(d)(5)(ii). Provide a separate upward and downward adjustment for foreign income taxes for which the foreign tax credit is disallowed and to which section 275(a)(4) does not apply. See Regulations section 1.905-1(d)(5) and the examples in Regulations section 1.905-1(d)(6) for additional information.

If multiple items are being changed on one Form 3115 and at least one item is changed on a cut-off basis or modified cut-off basis and another item is changed with a section 481(a) adjustment, check both “Yes” and “No” and attach a statement identifying which item(s) is being made on a cut-off basis or modified cut-off basis.

An eligible terminated S corporation (as defined in section 481(d)(2)) that is required to change an accounting method as a result of a revocation of its S corporation election must take into account the resulting positive or negative section 481(a) adjustment ratably during the 6-year period beginning with the year of change. In addition, an eligible terminated S corporation that is permitted to continue to use the cash method after the revocation of its S corporation election and that changes to an overall accrual method for the C corporation’s first tax year after such revocation may take into account the resulting positive or negative adjustment required by section 481(a)(2) ratably during the 6-year period beginning with the year of change. See Rev. Proc. 2018-44, 2018-37 I.R.B. 426. Section 481(d)(2) defines an eligible terminated S corporation as any C corporation that (1) was an S corporation on December 21, 2017; (2) revokes its S corporation election after December 21, 2017, but before December 22, 2019; and (3) has the same owners of stock in identical proportions on December 22, 2017, and the revocation date.

If the accounting method change is an automatic change in functional currency under section 985 (see section 29.01 of Rev. Proc. 2022-14), the adjustments required under Regulations section 1.985-5 must be made on the last day of the tax year ending before the year of change. Any gain or loss that must be recognized under Regulations section 1.985-5 is included in income or earning and profits on the last day of the tax year ending before the year of change, and is not subject to section 481. Attach a statement showing the adjustment required under Regulations section 1.985-5. The statement should include the amount of the adjustment required pursuant to Regulations section 1.985-5, a summary of the computation of such adjustment, and an explanation of any other adjustments required by Regulations section 1.985-5.

Except if instructed differently, you must attach a statement showing the (net) section 481(a) adjustment for each change in method for each applicant included on Form 3115. Include a summary of how the (net) section 481(a) adjustment was computed and an explanation of the methodology used to determine it. The summary of computation and explanation must be sufficient to demonstrate that the (net) section 481(a) adjustment is computed correctly. If the applicant is a CFC or 10/50 corporation, or a trade or business of a CFC or 10/50 corporation, and its functional currency is not the U.S. dollar, state the (net) section 481(a) adjustment in that functional currency. The statement may be combined with the information requested on the fourth line on page 1 (list the applicants and their identification numbers) and on line 24 (user fee).

Section 481(a) adjustments (or components of section 481(a) adjustments) from changes under DCN 248 included in the same Form 3115 must be stated in accordance with section 6.22(8) of Rev. Proc. 2022-14.

Line 26.

In computing the net section 481(a) adjustment, an applicant must take into account all relevant accounts. For some changes (for example, a change that affects multiple accounts), the section 481(a) adjustment is a net section 481(a) adjustment. See Example 2 above and the example under Schedule A, Part l, line 2h, later. If there is more than one method change requested, the section 481(a) adjustment is generally separately stated for each method change. However, some changes may require the netting of section 481(a) adjustments with those for certain other method changes made during the same year of change. See, for example, certain changes under section 16.10 of Rev. Proc. 2022-14.

If an election has been made under Regulations section 1.59A-3(c)(6)(i) to waive an allowed deduction for purposes of determining the section 59A base erosion and anti-abuse tax, and the method of accounting for the waived deduction is being changed, the amount of the net section 481(a) adjustment is determined without regard to the waived deduction. See Regulations section 1.59A-3(c)(6)(iii)(D). As a result, a waived deduction has no effect on the calculation of the amount of a section 481(a) adjustment. For an example illustrating how to calculate a section 481(a) adjustment with respect to a method of accounting for which an applicant has waived deductions, see Regulations 1.59A-3(d)(9) (Example 9).

Line 27.

Certain automatic method changes require an applicant with a section 481(a) adjustment remaining on a prior change in accounting method to take the remaining portion of the prior section 481(a) adjustment into account in the year of change. See, for example, DCNs 234 and 262. If applicable, enter the amount of the remaining portion of the section 481(a) adjustment from the prior change.

Line 28.

An applicant may elect a 1-year section 481(a) adjustment period for a positive section 481(a) adjustment that is less than $50,000. See section 7.03(3)(c) of Rev. Proc. 2015-13. An applicant may also elect a 1-year section 481(a) adjustment period for all positive section 481(a) adjustments for the year of change if an eligible acquisition transaction occurs during the year of change or in the subsequent tax year on or before the due date for filing the applicant's federal tax return for the year of change. For more details about the eligible acquisition transaction election, see section 7.03(3)(d) of Rev. Proc. 2015-13.

Line 29.

If “Yes,” explain the nature and amount of the section 481 adjustment attributable to the intercompany transaction(s).

Line 1. The deferral method for advance payments.

In general, advance payments must be included in gross income in the tax year of receipt for federal income tax purposes. However, under Regulations section 1.451-8(c) or (d), an applicant may defer the inclusion in income of certain advance payments (or a portion thereof), as defined in Regulations section 1.451-8(a)(1), to the next tax year. If the applicant is also using the advance payment cost offset method, the portion of any advance payment to which the cost offset applies is deferred to the tax year in which ownership of the good is transferred to the customer. Under the cost offset method, only the portion of the payment in excess of costs incurred is recognized by the year following the year of receipt.

Applicants with or without an applicable financial statement (AFS), as defined in Regulations section 1.451-3(a)(5), may be eligible to use a deferral method for advance payments. See section 451(c), Regulations section 1.451-8, and section 16.10 of Rev. Proc. 2022-14 for more information about the deferral method for advance payments.

Some applicants requesting to change to the deferral method must file under the non-automatic change procedures of Rev. Proc. 2015-13. See section 16.10(3) of Rev. Proc. 2022-14. All other applicants must generally file under the automatic change procedures of Rev. Proc. 2015-13.

If the applicant is requesting to change to the deferral method for advance payments described in Regulations section 1.451-8(c) or (d), attach a detailed description of the present and proposed methods including the following information.

Applicants filing under the non-automatic change procedures of Rev. Proc. 2015-13 should include all information requested in the instructions for Schedule B, line 1, and see Rev. Proc. 2015-13 and Non-automatic change scope and eligibility rules under Part III, earlier, for additional requirements.

Line 2. Cost offset methods.

Regulations section 1.451-3(c) allows taxpayers to use a cost offset accounting method to determine the AFS income inclusion amount from the sale of inventory (AFS cost offset method). See Regulations section 1.451-3(c) for the rules relating to the AFS cost offset method. Applicants using this method for a trade or business that have advance payments for the sale of inventory must also use the advance payment cost offset method described in Regulations section 1.451-8(e). If an applicant chooses to use the AFS cost offset method and/or the advance payment cost offset method, as applicable, it must use such method(s) for all items of gross income in the trade or business that meet the criteria set forth in Regulations sections 1.451-3(c) and 1.451-8(e), as applicable. Under the AFS cost offset method and the advance payment cost offset method, the cost of goods in progress offset must be determined separately for each item of inventory. Under some circumstances, an applicant without an AFS may use the advance payment cost offset method in Regulations section 1.451-8(e). See DCN 253 in section 16.10 of Rev. Proc. 2022-14. Applicants changing to or within a cost offset method may be required to make concurrent accounting method changes, including cost-offset related inventory changes, as defined in section 5.06 of Rev. Proc. 2015-13, as modified by section 4.02 of Rev. Proc. 2021-34. See DCN 255 in section 16.10 of Rev. Proc. 2022-14.

If the applicant is requesting to change to or within a cost offset method, attach a detailed description of the present and proposed methods including the following information.

Line 3. Methods to conform to the AFS income inclusion rule.

Generally, for an accrual method taxpayer, the all events test under Regulations section 1.451-1(a) for an item of gross income, or portion thereof, is met no later than when that item, or portion thereof, is taken into account as AFS revenue (AFS income inclusion rule). The AFS income inclusion rule does not apply to taxpayers that do not have an AFS, as defined in Regulations section 1.451-3(a)(5), for a tax year. See section 451(b), Regulations section 1.451-3, and DCN 250 in section 16.10 of Rev. Proc. 2022-14 for additional information about methods to conform to the AFS income inclusion rule.

If the applicant is requesting to change to or within a method to conform to the AFS income inclusion rule under section 451(b) and Regulations section 1.451-3, attach a detailed description of the present and proposed methods including the following information: