Beware of Making That Change in Accounting Method

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I hardly ever go on LinkedIn. Every time I go on there, it seems as if I am inundated with sales pitches.

By chance I clicked on the newsfeed and saw a post. What got my attention was this guy’s post of a picture of a redacted letter from the Florida Department of Revenue (FDR) showing an amount due of $500. The post stated this guy’s client owed an amount to the tune of $40,000 to the FDR, but this guy changed the method of accounting and got the bill down to $500.

Now, I hate when someone boasts and brags about tax stuff. I have certainly done this before but not for a very long time. I don’t reply to posts, but this was an exception. So I wrote, “before you take your victory lap, you might want to wait for the impending IRS audit.”

There are a few reasons to file Form 3115, which is the application for change in accounting method, and one of those is if you have a Cost Segregation Study. A Cost Segregation Study is when a company comes into one of your client’s place of business and reassess their fixed assets by breaking each asset down from a catch-all classification and longer recovery period to a shorter recovery period.

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About Craig W. Smalley, EA

Craig Smalley

Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.

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Mar 1st 2018 02:24

Good points that a lot of CPAs and EAs, myself included, forget from time to time. Using your example, the IRS would require one to report the $5,000 "retainer" in the year received as income, when one has the wherewithal to pay. You can't allocate the funds between revenues for hours billed and unearned revenues for hours not yet billed. So that would be an adjustment on Sch M1. Cost segregation studies seem of limited benefit to me, unless really big numbers are involved. You're paying for the time value of money, and taking a gamble that the hefty fees involved are outweighed by the immediate or shorter-term tax benefits.

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