When a business changes how it accounts for income or deductions - switching depreciation methods, changing revenue recognition, moving from accrual to cash, or correcting an impermissible method - it must use Form 3115 (Application for Change in Accounting Method) and compute a Section 481(a) adjustment. OBBBA's restoration of immediate R&E expensing under §174A made this one of the most urgent compliance issues of 2025-2026 for any company that had been capitalizing research costs. This guide explains the mechanics.
From 2022 through mid-2025, companies were required to capitalize and amortize domestic R&E expenditures over 5 years (15 years for foreign R&E) under the TCJA version of IRC §174. OBBBA enacted IRC §174A effective for tax years beginning after December 31, 2024, restoring immediate expensing of domestic R&E costs. Companies that capitalized R&E under the old rules must now file Form 3115 to change their accounting method - and they need to compute a Section 481(a) adjustment for all previously capitalized costs. Rev. Proc. 2025-28 provides the specific procedures.
Under IRC §446, a taxpayer must use a consistent accounting method from year to year. If a taxpayer wants to change its method - whether voluntarily or because it was using an impermissible method - it must obtain IRS consent. Form 3115 is the mechanism for requesting that consent.
An "accounting method" for this purpose includes not just broad systems like cash vs. accrual, but any consistent treatment of a specific item of income or deduction: how inventory is valued, when revenue is recognized, how assets are depreciated, whether certain costs are expensed or capitalized. Each item has its own method designation code (designated change number, or DCN) in Rev. Proc. 2023-24 (the current list of automatic change procedures).
Most common accounting method changes are "automatic" - meaning the IRS has pre-approved the change and the taxpayer does not need to wait for IRS approval before using the new method. The taxpayer simply files Form 3115 with the return for the year of change.
| Type | IRS Approval Required? | Where Filed | User Fee |
|---|---|---|---|
| Automatic Change | No - pre-approved list in Rev. Proc. 2023-24 | Attached to timely filed return (including extensions); copy to Ogden IRS Center | None |
| Non-Automatic Change | Yes - must file with IRS National Office before year-end of the year of change | IRS National Office in Washington DC; before the last day of the tax year of change | User fee required (currently $11,500 for most filers) |
When a taxpayer changes its accounting method, there is typically a gap or overlap between amounts accounted for under the old method and amounts that will be accounted for under the new method going forward. The Section 481(a) adjustment corrects this gap - it is a one-time catch-up (or catch-down) that accounts for the cumulative difference between the two methods as of the beginning of the year of change.
In computing taxable income for the year of change, there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted. The adjustment equals the cumulative book-tax difference that arose under the old method for all open and closed prior years.
| Type | What It Means | Tax Effect | Spread Period |
|---|---|---|---|
| Positive 481(a) | Switching to the new method would have resulted in more income being recognized in prior years. The adjustment adds income in the year of change to catch up. | Increases taxable income - creates a tax bill | Spread over 4 years (1/4 per year) for automatic changes; full inclusion in year of change for non-automatic |
| Negative 481(a) | Switching to the new method would have resulted in less income or more deductions in prior years. The adjustment reduces income in the year of change. | Reduces taxable income - creates a tax benefit | Taken entirely in the year of change - no spread required |
For automatic changes producing a positive §481(a) adjustment, Rev. Proc. 2015-13 §7.03 permits the taxpayer to spread the income inclusion over 4 tax years: 25% in the year of change and 25% in each of the next 3 years. This prevents a large lump-sum income inclusion in one year. The taxpayer must attach a statement to each subsequent return showing the remaining adjustment balance.
The 4-year spread is accelerated if the taxpayer is sold, liquidated, or ceases to exist before the spread period ends - the entire remaining adjustment becomes income in the final year.
Form 3115 is a 10-page form with multiple schedules. The key sections:
For automatic changes: the original Form 3115 is attached to the timely filed (including extensions) federal tax return for the year of change. A copy is mailed to the IRS in Ogden, Utah no later than the date the original return is filed.
| DCN | Change | Rev. Proc. |
|---|---|---|
| 7 | Cash to accrual or accrual to cash overall method change | Rev. Proc. 2023-24 |
| 23 | MACRS depreciation - improperly depreciated assets | Rev. Proc. 2023-24 |
| 64 | Tangible property regulations - capitalize vs. deduct (the "repair regs" change) | Rev. Proc. 2023-24 |
| 107 | Small business taxpayer inventory method (IRC §471(c)) | Rev. Proc. 2023-24 |
| 233 | Revenue recognition under ASC 606 / IRC §451(b) | Rev. Proc. 2023-24 |
| 280 | IRC §174A - domestic R&E from capitalization to immediate expensing (OBBBA) | Rev. Proc. 2025-28 |
If a taxpayer has been using a method that is not permitted under the IRC or regulations - for example, incorrectly capitalizing costs that should be expensed, or applying the wrong MACRS recovery period - changing to the correct method also requires Form 3115. The IRS takes the position that using an impermissible method is itself an accounting method, and correcting it requires following the §481(a) procedures.
Importantly, if an impermissible method was used for 2 or more consecutive years, the correction must go through Form 3115 - the taxpayer cannot simply file an amended return for the year of error. Amended returns are available only when the method has been used for a single year. This is a trap that frequently surprises practitioners who attempt to fix multi-year errors through amended returns rather than Form 3115.