For businesses looking to improve cash flow, manage tax liabilities, or adapt to growth, changing accounting methods can be a powerful strategy, especially in light of new IRS guidance and legislative updates. An accounting method determines how a company recognizes income and expenses, which in turn impacts various aspects, including tax compliance, financial reporting, and strategic planning.
Why Change Accounting Methods?
The choice of accounting method affects how a business measures profitability, tracks expenses, and reports taxable income. Companies often consider switching methods to:
- Accelerate deductions and defer income to reduce current tax liability
- Better match revenue and expenses across reporting periods
- Comply with updated IRS regulations or correct an impermissible method
- Improve financial clarity for stakeholders, lenders, or investors
Strategic changes may also help a business create or increase a net operating loss (NOL), which can be carried forward to offset future taxable income. On the other hand, some businesses may want to accelerate income if they expect to benefit from favorable tax conditions or use up an existing NOL.
What’s Required to Make a Change?
The IRS requires formal approval for accounting method changes. Most businesses must file Form 3115, Application for Change in Accounting Method, with either automatic or non-automatic procedures, depending on the type of change. Non-automatic changes must generally be filed by December 31 of the tax year in which the change takes effect for calendar year taxpayers, and they often require additional documentation.
The IRS recently issued Rev. Proc. 2025-23, which updates the list of permissible automatic changes and provides transition relief. This guidance incorporates earlier updates for Section 174 research and experimental (R&E) expenditures and adds options for taxpayers who previously filed method changes for short tax years.
Legislative Update: Percentage-of-Completion Method Exception
Under the One Big Beautiful Bill Act, Congress provided relief from Section 460(e), which requires the use of the percentage-of-completion method for long-term construction contracts.
For certain residential construction contracts entered into after the bill’s enactment, this method is no longer mandatory. This change allows eligible contractors to defer more income and better match revenue with costs, potentially an important shift for builders with large, multi-phase projects.
Considerations for 2025 and Beyond
Changing accounting methods can unlock tax benefits, but it also requires careful planning. Some key reminders:
- Changes must be applied consistently going forward
- Certain changes to the all-events test under Section 451 now require non-automatic procedures
- For long-term contracts or large capital investments, the method change must align with your broader tax strategy
With new IRS procedures and legislative updates taking effect in 2025, now is an ideal time to evaluate whether your current accounting method still aligns with your business goals. Whether you’re aiming to defer taxes, comply with evolving regulations, or enhance financial reporting, a strategic method change can deliver significant benefits. To explore your options, contact your Stephano Slack tax manager or partner at 610-687-1600 or email us at taxinfo@StephanoSlack.com.
Author Christine Fisher-Guyer, CPA, Partner, has provided top-notch accounting services to Stephano Slack’s clients. She manages the firm’s tax auditing and accounting operations and is an excellent problem solver, particularly in addressing client concerns. Chris can be contacted at 610-710-4729 or cguyer@stephanoslack.com.
Disclaimer: This content is for informational purposes only and doesn’t constitute professional advice.
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