How does IRS Rev Proc 2022-09 help with accounting changes?

Under Rev. Proc. 2022-9, the automatic change from cash to accrual accounting is available for small businesses that meet the following criteria:

• You are a small business if you had gross receipts of $25 million or less for the most recent three tax years.

• You are switching to accrual accounting for your business, including inventory (since accrual accounting requires you to account for inventory).

• You were previously using cash basis accounting.

The automatic change under Rev. Proc. 2022-9 means you do not need to file Form 3115, which is typically required for changing accounting methods. This makes the process easier and quicker.

To make the change, you must attach a statement to your tax return for the year of change. The statement must include the following:

• • A declaration that you are electing to change your method of accounting under Rev. Proc. 2022-9.
  • A reference to Rev. Proc. 2022-9 in your statement.
  • A description of the change in accounting method, specifically from cash basis to accrual basis.

For the year of change, you’ll apply accrual accounting principles starting from the first day of the tax year. You will need to adjust your income and expenses to reflect the new accounting method (e.g., tracking accounts receivable, inventory and accounts payable).

A Section 481(a) adjustment is generally required when changing accounting methods, as it accounts for the timing differences between cash and accrual accounting. However, under Rev. Proc. 2022-9, the adjustment can be spread over four years (instead of one year, which is the typical treatment).