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inventory valuation method. The applicant must complete

Schedule C—Changes Within the LIFO

Schedule D, Part III, Method of Cost Allocation. For exceptions,

Inventory Method

see Regulations section 1.263A-7(b)(2).

Line 5a. If the applicant properly elected the LIFO inventory

Use this schedule to request a change from one LIFO inventory

method but is unable to furnish a copy of Form(s) 970, attach

method or submethod to another LIFO inventory method or

the following statement to Form 3115:

submethod. All applicants changing within the LIFO inventory

method or submethods must complete Part I. Complete Part II

“I certify that to the best of my knowledge and belief (name

only if applicable.

of applicant) properly elected the LIFO inventory method by

filing Form 970 with its return for the tax year(s) ended (insert

Part I—General LIFO Information

date(s)) and otherwise complied with the provisions of section

Line 6. Applicants changing to the IPIC method must use this

472(d) and Regulations section 1.472-3.”

method for all LIFO inventories. This includes applicants

Line 5c. Attach the three statements required by section

requesting designated automatic accounting method change

10.01(4) in the Appendix of Rev. Proc. 2002-9.

numbers 61 or 62 in the List of Automatic Accounting

Method Changes.

Part III—Method of Cost Allocation

Applicants requesting to change their method of accounting for

Schedule D—Change in the Treatment of

any property (produced or acquired for resale) subject to

Long-Term Contracts Under Section 460,

section 263A or any long-term contracts as described in section

460 must complete this schedule.

Inventories, or Other Section 263A

If the change is for noninventory property that is subject to

Assets

section 263A, attach a detailed description of the types of

property involved and an explanation detailing how that

Part I—Change in Reporting Income

property was accounted for prior to January 1, 1987.

From Long-Term Contracts

There are several methods available for allocating and

capitalizing costs under section 263A, and for allocating and,

Line 2a. Under section 460(f), the term “long-term contract”

where appropriate, capitalizing costs properly allocable to

means any contract for the manufacture, building, installation,

long-term contracts. A change to or from any of these methods

or construction of property that is not completed in the tax year

is a change in accounting method that requires IRS consent.

in which it is entered into. However, a manufacturing contract

Using the applicable regulations and notice listed below, the

will not qualify as long-term unless the contract involves the

applicant should verify which methods are presently being used

manufacture of (a) a unique item not normally included in

and the proposed methods that will be used before completing

finished goods inventory or (b) any item that normally requires

Schedule D, Part III. These methods are as follows:

more than 12 calendar months to complete.

Generally, all long-term contracts entered into after July 10,

1. Allocating Direct and Indirect Costs

•

1989, that do not meet the exceptions under section 460(e)

Specific identification method — Regulations sections

must be accounted for using the percentage of completion

1.263A-1(f)(2) and 1.460-5.

•

method. See section 460 and the related regulations.

Burden rate method — Regulations sections 1.263A-1(f)(3)(i)

Line 2b. To qualify for the contract exceptions under section

and 1.460-5.

•

460(e), the contract must be:

Standard cost method — Regulations sections

1.263A-1(f)(3)(ii) and 1.460-5.

1. A home construction contract entered into after June 20,

•

Any other reasonable allocation method — Regulations

1988, involving dwelling units in buildings containing four or

sections 1.263A-1(f)(4) and 1.460-5.

fewer units, or

2. Any other construction contract entered into by the

2. Allocating Mixed Service Costs

applicant if, at the time the contract is entered into, it is

•

Direct reallocation method — Regulations section

expected to be completed within 2 years and the applicant’s

1.263A-1(g)(4)(iii)(A).

average annual gross receipts determined under section

•

Step-allocation method — Regulations section

460(e)(2) for the 3-year period preceding the tax year the

1.263A-1(g)(4)(iii)(B).

contract was entered into did not exceed $10 million.

•

Simplified service cost method:

Line 4b. Under the simplified cost-to-cost method, only certain

Using the labor-based allocation ratio — Regulations section

costs are used in determining both (a) costs allocated to the

1.263A-1(h)(4).

contract and incurred before the close of the tax year and

Using the production cost allocation ratio — Regulations

(b) estimated contract costs. These costs are: (1) direct

section 1.263A-1(h)(5).

•

material costs; (2) direct labor costs; and (3) allowable

Any other reasonable allocation method — Regulations

deductions for depreciation, amortization, and cost recovery

section 1.263A-1(f)(4).

allowances on equipment and facilities directly used to

3. Capitalizing Additional Section 263A Costs

construct or produce the subject matter of the long-term

•

Simplified production method:

contract. See Regulations section 1.460-5(c).

Without historic absorption ratio election — Regulations

Part II—Change in Valuing Inventories Including

section 1.263A-2(b)(3).

Cost Allocation Changes

With historic absorption ratio election — Regulations section

If the applicant is currently using a LIFO inventory method or

1.263A-2(b)(4).

•

submethod and is changing to another LIFO inventory method

Simplified resale method:

or submethod, Part II is not applicable. Use Schedule C,

Without historic absorption ratio election — Regulations

Changes Within the LIFO Inventory Method.

section 1.263A-3(d)(3).

Line 3. If an applicant is subject to, but not in compliance with,

With historic absorption ratio election — Regulations section

section 263A, generally on the same Form 3115 the applicant

1.263A-3(d)(4).

•

must first comply with section 263A before changing an

U.S. ratio method — Notice 88-104, 1988-2 C.B. 443.

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Instructions For Form 3115 - Application For Change In Accounting Method - Internal Revenue Service - 2006 Page 8

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