Key Takeaways
- Hybrid method: accrual for inventory, cash for other items.
- Method change requires Form 3115 (IRS consent).
- Positive §481(a) adjustment: spread over 4 years.
- Negative §481(a) adjustment: 1 year (full recognition).
- Automatic consent: many common changes, no user fee.
- Error correction: amended return, NOT Form 3115.
Last updated: January 2026
Hybrid Methods & Changes
Why This Matters for the Exam
Method changes require IRS consent. The exam tests §481(a) adjustments and the distinction between method change and error correction.
Expect at least 3-4 questions on method changes.
Hybrid Methods
| Rule | Description |
|---|---|
| Permitted | Accrual for inventory, cash for other |
| Consistency | Must use same method for income and expense categories |
| Cannot | Accrue expenses while cash for income |
| Requirement | Must clearly reflect income |
Changing Accounting Methods
| Type | Procedure |
|---|---|
| Automatic consent | File Form 3115, no user fee |
| Non-automatic | File Form 3115, pay user fee, 180-day IRS review |
| Error correction | Amended return (NOT Form 3115) |
Method Change vs. Error Correction
| Type | Example | Form |
|---|---|---|
| Method change | Cash to accrual | Form 3115 |
| Method change | FIFO to LIFO | Form 3115 |
| Error correction | Math error | Amended return |
| Error correction | Posting error | Amended return |
Section 481(a) Adjustments
| Adjustment | Timing |
|---|---|
| Positive (+) | Increases income → 4-year spread |
| Negative (-) | Decreases income → 1-year full recognition |
De Minimis Election
| Rule | Description |
|---|---|
| Positive adjustment <$50,000 | Can elect full 1-year recognition |
| Simplifies records | For small businesses |
§481(a) Calculation Example
| Item | Amount |
|---|---|
| Uncollected A/R (new accrual) | $400,000 |
| Unpaid A/P (new accrual) | ($100,000) |
| Net adjustment | $300,000 (positive) |
| Annual recognition | $75,000 × 4 years |
Real-World Scenario
Scenario: Law firm changes from cash to accrual. Has $400,000 A/R and $100,000 A/P.
- Positive adjustment: $400,000 - $100,000 = $300,000.
- Spread: $300,000 ÷ 4 = $75,000 per year.
- Year 1 income increase: $75,000.
On the Exam
Expect 3-4 questions on method changes, typically:
- Form Questions: "What form for method change?"
- Adjustment Questions: "How is positive adjustment recognized?"
- Distinction Questions: "Is this method change or error correction?"
The key is to remember: Form 3115 for method changes. Positive §481(a) = 4 years. Negative = 1 year. Error correction = amended return, NOT Form 3115.
Test Your Knowledge
Cash to accrual change: $100,000 positive §481(a) adjustment. 2024 income increase?
A
B
C
D
Test Your Knowledge
Which does NOT require Form 3115?
A
B
C
D
Test Your Knowledge
Accrual for inventory, cash for admin expenses. Permitted?
A
B
C
D