Six-Year Spread Applies to 481(a) Adjustments After Terminated S Corporation’s Accounting Method Change


New temporary rules clarify a six-year spread period for Code Sec. 481(a)adjustments after an eligible terminated S corporation changes from a cash to an accrual method of accounting. These rules apply if the corporation revokes its S corporation election during the two-year period beginning on December 22, 2017.

Required Change in Accounting Method

The six-year adjustment period is mandatory if the eligible terminated S corporation is required to change from the cash method to an accrual method of accounting. The six-year spread period begins with the first year of the change.

Optional Change in Accounting Method

However, the six-year adjustment period is optional if the eligible terminated S corporation may continue to use the cash method but, nonetheless, changes to an accrual method for its first tax year as a C corporation. The corporation must indicate that it is choosing the six-year spread period in the statement required by Line 26 of Form 3115. Again, the six-year spread period begins with the first year of the change.

Other Changes

The six-year spread period does not apply to other 481(a) adjustments that might result when an eligible S corporation revokes its S election.

Eligible Terminated S Corporations

An eligible terminated S corporation is any C corporation that: