Right from the start: IRS Form 3115
Form 3115, otherwise known as the Application for Change in Accounting Method, allows business owners to switch accounting methods. The form is required for both changing your overall accounting method or the treatment of a particular item. There are three general methods businesses choose from:
Accrual accounting records both revenue and expenses as they are incurred. This is one of the more common methods for most businesses. Accrual accounting is a bit more advanced, however, as it uses Accounts Payable and Accounts Receivable. Additionally, it tracks long-term liabilities and uses double-entry bookkeeping.
Cash-basis accounting only uses cash accounts, recording income once you receive it and reporting expenses once you pay them. It’s one of the simplest methods, influencing many small businesses to use it. However, cash-basis accounting tends to be less accurate than accrual accounting in regard to short-term items.
Modified cash-basis accounting
Modified cash-basis accounting acts as a hybrid, mixing accrual and cash-basis together. This method allows businesses to record both short-term and long-term items, but only records expenses and income when money is paid or received.
When and where to file
There are two methods of requesting change with a Form 3115. You can file in duplicate by attaching the original form to your federal income tax return. You also need to file a copy of the form with the IRS (Internal Revenue Service) National Office after the first day of the year.
You can also file an advanced consent request. These must be filed before the last day of the requested year of change. Whichever method you choose, it can either be e-filed with the rest of your tax return or physically mailed to the IRS with your tax return.
What to include on Form 3115
Filling out this form requires a great deal of detailed information about you and your business. For example, you’ll need to include:
- Identification number
- Phone number
- Applicant type
- Tax year information
- Accounting details
You also attach several supporting documents such as your business’s income statement, balance sheets from the previous year and any adjustments you made. The final attachment is a statement specifying the accounting method you used while preparing your sheets.
IRS Form 3115 best practices
The following list outlines best practices when using Form 3115:
Use a tax ID number
When the form asks for an ID number, both resident and non-resident aliens enter their individual taxpayer identification number (ITIN). If the form is filed as a joint return, enter the ITIN for both spouses.
File after the first day of the year of the change
There are no specific deadlines for the form. However, the earlier you file your Form 3115, the more time the IRS has to solve any issues. Generally, you submit the form after the first day of the year of the change.
Look for new guidance
The IRS changes its rules and requirements often. Before filing your Form 3115, always check the IRS website for any updates regarding their requirements and general filing process. Potential changes to look for include revenue procedures, notices or regulations.
Ensure your preparer signs your form
If you use a tax preparer to help with Form 3115, they’re required to both sign it and provide their Preparer Tax Identification Number (PTIN). Additionally, during the signing process, never sign a blank return as it poses a significant financial risk for you or your company. Signing should always come after both parties fill out the form.
Related: 10 Steps to Starting a Business
IRS Form 3115 FAQs
The following list answers some of the most frequently asked questions regarding Form 3115:
- Who needs to file a Form 3115?
- Can you amend Form 3115?
- Can you fill out Form 3115 for missed depreciation?
- How do you choose the best tax professional for your business?
Who needs to file a Form 3115?
Business owners are usually who file these forms. If not an owner, a representative of the owner files in their stead. Some of the businesses or individuals who file include:
- Exempt organizations
- S corporations
Can you amend Form 3115?
If you find that after you file you entered incorrect information or forgotten to include an item, there is a way to amend your form. However, it’s a complicated process and the use of a professional tax preparer comes highly recommended.
Can you fill out Form 3115 for missed depreciation?
Taxpayers can correct depreciation deductions by claiming the missed depreciation and correcting the depreciation methods for future years. However, eligibility for claiming missed depreciation varies by situation. Contact a tax preparer for additional help.
How do you choose the best tax professional for your business?
Choosing the right tax professional for your business is essential for successful use of Form 3115. When searching for the best tax professional, ensure they have a PTIN. Compare fees with multiple tax professionals as their prices vary widely. Additionally, the IRS requires paid preparers who conduct more than 10 returns for clients to file electronically via the IRS’ e-file system. If your preparer doesn’t e-file, it may be a sign that they have limited experience, or in worst cases, aren’t legally allowed to do the work.