Businesses may use one of two accounting methods to keep track of their income and expenses. If they use the cash method, they record income when it's received and record expenses when they are paid. Conversely, the accrual method requires businesses to record income when it's earned and expenses when they're incurred. The Internal Revenue Service (IRS) expects businesses to choose a method and stick to it, but if you discover that you chose the less advantageous method tax-wise, you can ask the IRS for permission to change methods.
Obtain Form 3155 from the IRS. You can download this form from the IRS' website or request a copy from the IRS. You need to complete this form to get permission from the IRS to change your accounting method for tax purposes.
Fill out the form. Answer questions about the reason you are changing accounting methods. You must also provide details about whether you are changing your overall accounting method or changing the accounting method only for certain items. Attach paperwork explaining the reason for the change in detail as well as a detailed description of your business, including details about the goods and services your business provides.
Submit Form 3155 and wait for the IRS' response. There is no set time for the IRS to respond. It will notify you by mail of its decision.
Look through your financial records. Examine your accounts receivable statements. If you have any income that you expect and have not received, add it to your income for the reporting period. Report any accounts payable that you need to pay during the reporting period and have not paid yet as an expense.
Add any other sources of income that you haven't received yet to your income and subtract any other expenses that you haven't paid yet.
Continue reporting income as you earn it and expenses as you incur them instead of reporting income when it is received or expenses when they are paid.
- Ask your CPA or tax advisor for help with Form 3155 to ensure that you complete it correctly.