Reg. § 1.448-1 Limitation on the use of the cash receipts and disbursements method of accounting.
(a)-(f) [Reserved]
(g) Treatment of accounting method change and timing rules for section 481(a) adjustment
(1) Treatment of change in accounting method The rules provided in of this section apply to taxable years beginning before January 1, 2018. See for rules relating to taxable years beginning after December 31, 2017. Notwithstanding any other procedure published prior to January 7, 1991, concerning changes from the cash method, any taxpayer to whom section applies must change its method of accounting in accordance with the provisions of this and of this section. In the case of any taxpayer required by this section to change its method of accounting for any taxable year, the change shall be treated as a change initiated by the taxpayer. The adjustments required under section with respect to the change in method of accounting of such a taxpayer shall not be reduced by amounts attributable to taxable years preceding the Internal Revenue Code of 1954. of this section provides procedures under which a taxpayer may change to an overall accrual method of accounting for the first taxable year the taxpayer is subject to this section (“first section year”). If the taxpayer complies with the provisions of of this section for its first section year, the change shall be treated as made with the consent of the Commissioner. of this section provides procedures under which a taxpayer may change to other than an overall accrual method of accounting for its first section year. Unless the taxpayer complies with the provisions of or of this section for its first section year, the taxpayer must comply with the provisions of of this section. See of this section for rules to effect a change in method of accounting.
(2) Timing rules for section 481(a) adjustment
(i) In general Except as otherwise provided in and of this section, a taxpayer required by this section to change from the cash method must take the net section adjustment into account over the section adjustment period as determined under the applicable administrative procedures issued under for obtaining the Commissioner's consent to a change in accounting method (for example, see Rev. Proc. 2002-9 (2002-1 C.B. 327) and Rev. Proc. 97-27 (1997-1 C.B. 680) (also see )), provided the taxpayer complies with the provisions of or of this section for its first section year.
(ii) Hospital timing rules
(A) In general In the case of a hospital that is required by this section to change from the cash method, the section adjustment shall be taken into account ratably (beginning with the year of change) over 10 years, provided the taxpayer complies with the provisions of or of this section for its first section year.
(B) Definition of hospital For purposes of of this section, a hospital is an institution—
(1) Accredited by the Joint Commission on Accreditation of Healthcare Organizations or its predecessor (the JCAHO) (or accredited or approved by a program of the qualified governmental unit in which such institution is located if the Secretary of Health and Human Services has found that the accreditation or comparable approval standards of such qualified governmental unit are essentially equivalent to those of the JCAHO);
(2) Used primarily to provide, by or under the supervision of physicians, to inpatients diagnostic services and therapeutic services for medical diagnosis, treatment, and care of injured, disabled, or sick persons;
(3) Requiring every patient to be under the care and supervision of a physician; and
(4) Providing 24-hour nursing services rendered or supervised by a registered professional nurse and having a licensed practical nurse or registered nurse on duty at all times.
For purposes of this section, an entity need not be owned by or on behalf of a governmental unit or by a section organization, or operated by a section organization, in order to be considered a hospital. In addition, for purposes of this section, a hospital does not include a rest or nursing home, continuing care facility, daycare center, medical school facility, research laboratory, or ambulatory care facility.
(C) Dual function facilities With respect to any taxpayer whose operations consist both of a hospital, and other facilities not qualifying as a hospital, the portion of the adjustment required by section that is attributable to the hospital shall be taken into account in accordance with the rules of of this section relating to hospitals. The portion of the adjustment required by section that is not attributable to the hospital shall be taken into account in accordance with the rules of of this section not relating to hospitals.
(iii) Untimely change in method of accounting to comply with this section Unless a taxpayer (including a hospital and a cooperative) required by this section to change from the cash method complies with the provisions of or of this section for its first section year within the time prescribed by those paragraphs, the taxpayer must take the section (a) adjustment into account under the provisions of any applicable administrative procedure that is prescribed by the Commissioner after January 7, 1991, specifically for purposes of complying with this section. Absent such an administrative procedure, a taxpayer must request a change under and shall be subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner.
(3) Special timing rules for section 481(a) adjustment
(i) Cessation of trade or business If the taxpayer ceases to engage in the trade or business to which the section adjustment relates, or if the taxpayer operating the trade or business terminates existence, and such cessation or termination occurs prior to the expiration of the adjustment period described in or of this section, the taxpayer must take into account, in the taxable year of such cessation or termination, the balance of the adjustment not previously taken into account in computing taxable income. For purposes of this , the determination as to whether a taxpayer has ceased to engage in the trade or business to which the section adjustment relates, or has terminated its existence, is to be made under the principles of and its underlying administrative procedures.
(ii) De minimis rule for a taxpayer other than a cooperative Notwithstanding and of this section, a taxpayer other than a cooperative (within the meaning of section ) that is required to change from the cash method by this section may elect to use, in lieu of the adjustment period described in and of this section, the adjustment period for de minimis section adjustments provided in the applicable administrative procedure issued under for obtaining the Commissioner's consent to a change in accounting method. A taxpayer may make an election under this only if—
(A) The taxpayer's entire net section adjustment (whether positive or negative) is a de minimis amount as determined under the applicable administrative procedure issued under for obtaining the Commissioner's consent to a change in accounting method,
(B) The taxpayer complies with the provisions of or of this section for its first section year,
(C) The return for such year is due (determined with regard to extensions) after December 27, 1993, and
(D) The taxpayer complies with any applicable instructions to Form 3115 that specify the manner of electing the adjustment period for de minimis section adjustments.
(4) Additional rules relating to section 481(a) adjustment In addition to the rules set forth in and of this section, the following rules shall apply in taking the section adjustment into account—
(i) Any net operating loss and tax credit carryforwards will be allowed to offset any positive section adjustment,
(ii) Any net operating loss arising in the year of change or in any subsequent year that is attributable to a negative section adjustment may be carried back to earlier taxable years in accordance with section , and
(iii) For purposes of determining estimated income tax payments under sections and , the section adjustment will be recognized in taxable income ratably throughout a taxable year.
(5) Outstanding section 481(a) adjustment from previous change in method of accounting If a taxpayer changed its method of accounting to the cash method for a taxable year prior to the year the taxpayer was required by this section to change from the cash method (the section year), any section adjustment from such prior change in method of accounting that is outstanding as of the section year shall be taken into account in accordance with the provisions of this . A taxpayer shall account for any remaining portion of the prior section adjustment outstanding as of the section year by continuing to take such remaining portion into account under the provisions and conditions of the prior change in method of accounting, or, at the taxpayer's option, combining or netting the remaining portion of the prior section adjustment with the section adjustment required under this section, and taking into account under the provisions of this section the resulting net amount of the adjustment. Any taxpayer choosing to combine or net the section adjustments as described in the preceding sentence shall indicate such choice on the Form 3115 required to be filed by such taxpayer under the provisions of of this section.
(h) Procedures for change in method of accounting
(1) Applicability The rules provided in of this section apply to taxable years beginning before January 1, 2018. See for rules relating to taxable years beginning after December 31, 2017. of this section applies to taxpayers who change from the cash method as required by this section. of this section does not apply to a change in accounting method required by any Code section (or regulations thereunder) other than this section.
(2) Automatic rule for changes to an overall accrual method
(i) Timely changes in method of accounting Notwithstanding any other available procedures to change to the accrual method of accounting, a taxpayer to whom of this section applies who desires to make a change to an overall accrual method for its first section year must make that change under the provisions of this . A taxpayer changing to an overall accrual method under this must file a current Form 3115 by the time prescribed in paragraph (h)(2)(ii). In addition, the taxpayer must set forth on a statement accompanying the Form 3115 the period over which the section adjustment will be taken into account and the basis for such conclusion. Moreover, the taxpayer must type or legibly print the following statement at the top of page 1 of the Form 3115: “Automatic Change to Accrual Method—Section .” The consent of the Commissioner to the change in method of accounting is granted to taxpayers who change to an overall accrual method under this . See , , or of this section, whichever is applicable, for rules to account for the section adjustment.
(ii) Time and manner for filing Form 3115
(A) In general Except as provided in of this section, the Form 3115 required by paragraph (h)(2)(i) must be filed no later than the due date (determined with regard to extensions) of the taxpayer's federal income tax return for the first section year and must be attached to that return.
(B) Extension of filing deadline Notwithstanding of this section, the filing of the Form 3115 required by paragraph (h)(2)(i) shall not be considered late if such Form 3115 is attached to a timely filed amended income tax return for the first section year, provided that—
(1) The taxpayer's first section year is a taxable year that begins (or, pursuant to , is deemed to begin) in 1987, 1988, 1989, or 1990,
(2) The taxpayer has not been contacted for examination, is not before appeals, and is not before a federal court with respect to an income tax issue (each as defined in applicable administrative pronouncements), unless the taxpayer also complies with any requirements for approval in those applicable administrative pronouncements, and
(3) Any amended return required by this is filed on or before July 8, 1991.
Filing an amended return under this does not extend the time for making any other election. Thus, for example, taxpayers that comply with this section by filing an amended return pursuant to this may not elect out of section pursuant to of this section.
(3) Changes to a method other than overall accrual method
(i) In general A taxpayer to whom of this section applies who desires to change to a special method of accounting must make that change under the provisions of this , except to the extent other special procedures have been promulgated regarding the special method of accounting. Such a taxpayer includes taxpayers who change to both an accrual method of accounting and a special method of accounting such as a long-term contract method. In order to change an accounting method under this , a taxpayer must submit an application for change in accounting method under the applicable administrative procedures in effect at the time of change, including the applicable procedures regarding the time and place of filing the application for change in method. Moreover, a taxpayer who changes an accounting method under this must type or legibly print the following statement on the top of page 1 of Form 3115: “Change to a Special Method of Accounting—Section .” The filing of a Form 3115 by any taxpayer requesting a change of method of accounting under this for its taxable year beginning in 1987 will not be considered late if the form is filed with the appropriate office of the Internal Revenue Service on or before the later of: the date that is the 180th day of the taxable year of change; or September 14, 1987. If the Commissioner approves the taxpayer's application for change in method of accounting, the timing of the adjustment required under section (a), if applicable, will be determined under the provisions of , , or of this section, whichever is applicable. If the Commissioner denies the taxpayer's application for change in accounting method, or if the taxpayer's application is untimely, the taxpayer must change to an overall accrual method of accounting under the provisions of either or of this section, whichever is applicable.
(ii) Extension of filing deadline Notwithstanding of this section, if the events or circumstances which under section disqualify a taxpayer from using the cash method occur after the time prescribed under applicable procedures for filing the Form 3115, the filing of such form shall not be considered late if such form is filed on or before 30 days after the close of the taxable year.
(4) Untimely change in method of accounting to comply with this section Unless a taxpayer to whom of this section applies complies with the provisions of or of this section for its first section year, the taxpayer must comply with the requirements of (including any applicable administrative procedure that is prescribed thereunder after January 7, 1991 specifically for purposes of complying with this section) in order to secure the consent of the Commissioner to change to a method of accounting that is in compliance with the provisions of this section. The taxpayer shall be subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner.
(i) Effective date
(1) In general Except as provided in , , , and of this section, this section applies to any taxable year beginning after December 31, 1986.
(2) Election out of section 448
(i) In general A taxpayer may elect not to have this section apply to any
(A) transaction with a related party (within the meaning of section of the Internal Revenue Code of 1954, as in effect on October 21, 1986),
(B) loan, or
(C) lease, if such transaction, loan, or lease was entered into on or before September 25, 1985. Any such election described in the preceding sentence may be made separately with respect to each transaction, loan, or lease. For rules relating to the making of such election, see (temporary regulations relating to elections under the Tax Reform Act of 1986). Notwithstanding the provisions of this , the gross receipts attributable to a transaction, loan, or lease described in this shall be taken into account for purposes of the $5,000,000 gross receipts test described in of this section.
(ii) Special rules for loans If the taxpayer makes an election under of this section with respect to a loan entered into on or before September 25, 1985, the election shall apply only with respect to amounts that are attributable to the loan balance outstanding on September 25, 1985. The election shall not apply to any amounts advanced or lent after September 25, 1985, regardless of whether the loan agreement was entered into on or before such date. Moreover, any payments made on outstanding loan balances after September 25, 1985, shall be deemed to first extinguish loan balances outstanding on September 25, 1985, regardless of any contrary treatment of such loan payments by the borrower and lender.
(3) Certain contracts entered into before September 25, 1985 This section does not apply to a contract for the acquisition or transfer of real property or a contract for services related to the acquisition or development of real property if—
(i) The contract was entered into before September 25, 1985; and
(ii) The sole element of the contract which was not performed as of September 25, 1985, was payment for such property or services.
(4) Transitional rule for paragraphs (g) and (h) of this section To the extent the provisions of and of this section were not reflected in paragraphs (g) and (h) of § (as set forth in 26 CFR part 1 as revised on April 1, 1993), and of this section will not be adversely applied to a taxpayer with respect to transactions entered into before December 27, 1993.
(5) Effective date of paragraph (g)(2)(i) of this section applies to taxable years ending on or after June 16, 2004.
[T.D. 8514, 58 FR 68299, Dec. 27, 1993, as amended by T.D. 8996, 67 FR 35012, May 17, 2002; T.D. 9131, 69 FR 33572, June 16, 2004; T.D. 9942, 86 FR 268, Jan. 5, 2021]