How to Change Acccounting Methods for Your Business

Published Jan. 4, 2010 at 5:07 a.m.

Changing your accounting method requires approval from the IRS.The United States Internal Revenue Service (IRS) allows businesses to use either the accrual accounting method or the cash accounting method, or a combination of both accounting systems, to track and report financial data for a business.However, whatever method you inform the IRS that you have chosen during the first year of your business you must continue to use during subsequent tax reporting years.

If you wish to change accounting methods you are required to get permission from the IRS in advance. Failure to do so can result in penalties imposed by the IRS.

Once you have set up your accounting method and filed your first return, you must get IRS approval before you change the method. In general, you must file a current Form 3115 to request a change in either an overall accounting method or the accounting treatment of any item.

The following are changes in accounting method that require approval from the IRS:

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• Switching from a cash basis method to an accrual basis method;
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• Switching from an accrual basis method to a cash basis method;
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• Change in method or basis used to value your inventory; and
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• A change in depreciation or amortization method (exception: some changes in the straight-line method are permitted without permission from the IRS.)

If you are thinking about changing your accounting method, read How Can I Change My Accounting Method?  This article tells you about filing Form 3115 to get advance or automatic change requests from the IRS.

Related Articles:

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• Cash Basis Accounting Method
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• Accrual Basis Accounting Method
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• Accounting Terms and Definitions
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• Federal Income Tax FAQs

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How to Change Acccounting Methods for Your Business originally appeared on About.com Women in Business on Monday, January 4th, 2010 at 10:07:55.

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