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method applicant electing to exclude from gross income some

including in gross income any discounts taken to a method of

or all of the income attributable to qualified sales during the tax

reducing the cost of the goods by the cash discounts and

year of magazines, paperbacks, or records that are returned

deducting as an expense any discounts not taken, or vice

before the close of the applicable merchandise return period for

versa. Complete Schedule D, Parts II and III, of Form 3115, as

that tax year. The applicant’s Form 3115 need contain only the

applicable. See section 9.01 in the Appendix of Rev. Proc.

information listed in Regulations section 1.458-2(d). This

2002-9.

election does not fall under the procedures of Rev. Proc.

49. Estimating inventory shrinkage (section 471) — from

2002-9. Instead, see Regulations section 1.458-2.

the present method of estimating inventory shrinkage in

41. Percentage-of-completion (section 460) — for an

computing ending inventory to the “retail safe harbor method” in

applicant not required by section 460 to use the

section 4 of Rev. Proc. 98-29, 1998-15 I.R.B. 22, or to a

percentage-of-completion method to account for its long-term

method other than the retail safe harbor method, provided

contracts, from an exempt-contract method to the

(a) the applicant’s present method of accounting does not

percentage-of-completion method. Complete Schedule D, Parts

estimate inventory shrinkage and (b) the applicant’s new

I and III, of Form 3115. Audit protection does not apply to this

method of accounting (that estimates inventory shrinkage)

change. This change is made on a cut-off basis. See section

clearly reflects income under section 446(b). Complete

7A.02 in the Appendix of Rev. Proc. 2002-9.

Schedule D, Parts II and III, of Form 3115, as applicable. If

42. Timing of incurring employee medical benefits

changing to a method other than the “retail safe harbor

liabilities (section 461) — for an applicant with an obligation to

method,” attach the statement required by section 9.02(3) in the

pay an employee’s medical expenses that is neither insured nor

Appendix of Rev. Proc. 2002-9. Scope limitations do not apply

paid from a welfare benefit fund, to treatment as a liability

to this change. Audit protection does not apply in certain cases.

incurred in the tax year in which the applicant’s employee files

See section 9.02 in the Appendix of Rev. Proc. 2002-9.

the claim with the applicant. See section 8.01 in the Appendix of

50. Small taxpayer ($1 million) inventory exception

Rev. Proc. 2002-9.

(section 471) — for a qualifying applicant, from the present

43. Timing of incurring real property, personal property,

method of accounting for inventoriable items (including, if

and state income tax liabilities (section 461) — for a

applicable, the method of capitalizing costs under section 263A)

qualifying applicant, to treating these taxes as incurred in the

to treating inventoriable items in the same manner as materials

tax year in which the taxes are paid, or to account for these

and supplies that are not incidental under Regulations section

taxes under the recurring item exception to the economic

1.162-3. Complete Schedule A, Part I, and Schedule D, Parts II

performance rules, or to revoke the ratable accrual election

and III, of Form 3115, as applicable. Scope limitations do not

under section 461(c). See section 8.02 in the Appendix of Rev.

apply to this change. The applicant may request this change

Proc. 2002-9.

and designated automatic accounting method change number

44. Timing of incurring workers’ compensation act, tort,

32 (overall cash method ($1 million)) on a single Form 3115.

breach of contract, or violation of law liabilities (section

See section 9.03 in the Appendix of Rev. Proc. 2002-9.

461) — for a qualifying applicant accounting for self-insured

51. Small taxpayer ($10 million) inventory exception

liabilities arising under any workers’ compensation act or out of

(section 471) — for a qualifying applicant, from the present

any tort, breach of contract, or violation of law, to treating the

method of accounting for inventoriable items (including, if

liability as incurred in the tax year in which (a) all the events

applicable, the method of capitalizing costs under section 263A)

have occurred establishing the fact of the liability, (b) the

to treating inventoriable items in the same manner as materials

amount of the liability can be determined with reasonable

and supplies that are not incidental under Regulations section

accuracy, and (c) payment is made to the person to which the

1.162-3. Complete Schedule D, Parts II and III, of Form 3115,

liability is owed. See section 8.03 in the Appendix of Rev. Proc.

as applicable. Scope limitations do not apply to this change.

2002-9.

The applicant may request this change and designated

45. Timing of incurring payroll tax liabilities (section

automatic accounting method change number 33 (overall cash

461) — for FICA and FUTA taxes, state unemployment taxes,

method ($10 million)) on a single Form 3115. See Rev. Proc.

and railroad retirement taxes, to the method under which the

2002-28, 2002-18 I.R.B. 815.

applicant may deduct in Year 1 its otherwise deductible FICA

52. “Floor stocks” (section 471) — for payments made or

and FUTA taxes, state unemployment taxes, and railroad

received with respect to “floor stocks,” to conform with the

retirement taxes imposed with respect to year-end wages

holding of Rev. Rul. 2001-8, 2001-9 I.R.B. 726, or to elect the

properly accrued in Year 1, but paid in Year 2, if the

simplifying assumption regarding goods on hand described in

requirements of the recurring item exception are met, or, for

Rev. Rul. 2001-8. Complete Schedule D, Parts II and III, of

state unemployment taxes and railroad retirement taxes, to the

Form 3115, as applicable. If electing the simplifying

method stated above where the applicant already uses that

assumption, provide the statement described in section

method of accounting for FICA and FUTA taxes. See section

9.04(4)(b) in the Appendix of Rev. Proc. 2002-9. Scope

8.04 in the Appendix of Rev. Proc. 2002-9.

limitations do not apply to this change. This change is made on

46. Cooperative advertising (section 461) — to incurring a

a cut-off basis. See section 9.04 in the Appendix of Rev. Proc.

liability in the tax year in which these services are performed,

2002-9.

provided the manufacturer is able to reasonably estimate this

53. Qualifying volume-related trade discounts (section

liability even though the retailer does not submit the required

471) — to treating qualifying volume-related trade discounts as

claim form until the following year. See section 8.05 in the

a reduction in the cost of merchandise purchased at the time

Appendix of Rev. Proc. 2002-9.

the discount is recognized in accordance with Regulations

47. Distributor commissions (section 461) — from

section 1.471-3(b). Complete Schedule D, Parts II and III, of

deducting distributor commissions to capitalizing and

Form 3115, as applicable. See section 9.05 in the Appendix of

amortizing distributor commissions using the distribution fee

Rev. Proc. 2002-9.

period method, the 5-year method, or the useful life method.

This change is made on a cut-off basis. See section 8.06(2) in

54. Impermissible methods of inventory valuation

the Appendix of Rev. Proc. 2002-9.

(section 471) — to restore an inventory writedown or to

48. Cash discounts (section 471) — for cash discounts

discontinue maintaining a reserve specifically described within

granted for timely payment, when such discounts approximate a

Regulations section 1.471-2(f). Complete Schedule D, Parts II

fair interest rate, from a method of consistently including the

and III, of Form 3115, as applicable. See section 9.06 in the

price of the goods before discount in the cost of the goods and

Appendix of Rev. Proc. 2002-9.

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Instructions For Form 3115 - Application For Change In Accounting Method - Internal Revenue Service - 2006 Page 12

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