26 U.S.C. § 481 — Adjustments required by changes in method of accounting

(a) General rule. When figuring taxable income for the year a taxpayer changes its accounting method (called the "year of the change"), if the new method differs from the method used the year before, the taxpayer must make adjustments needed solely because of the change, so that no income is counted twice or left out. However, an adjustment for a year this section doesn't apply to is not counted, unless the adjustment came from a method change the taxpayer itself started. (b) Limit on tax when adjustments are large. (1) Three-year allocation. If the taxpayer used the old accounting method for the two years right before the change, and the resulting increase in taxable income for the change year is more than $3,000, then the extra tax from that increase cannot be higher than what the combined tax increase would be if one-third of the extra income were counted in the change year and one-third in each of the two years before it. (2) Allocation under the new method. If the increase in taxable income is more than $3,000, and the taxpayer can show what its taxable income would have been under the new method for one or more years right before the change, then the extra tax cannot be higher than what the combined tax increase would be if the adjustments were assigned to those earlier years (as the new method would have assigned them), with the rest assigned to the change year. (3) Special computation rules. When making these three-year or new-method calculations: any change in tax for an earlier year not covered by an adjustment, but still affected by a net operating loss or a capital loss carryback or carryover tied to the adjusted years, must be counted; and if a deficiency, credit, or refund for an earlier year is legally barred, its increase or decrease in tax is based on the amount previously determined for that year. (c) Adjustments under regulations. The Treasury Secretary can, by regulation, let a taxpayer spread the required adjustments over the tax year or years the regulations allow, instead of using the timing above. (d) Adjustments for S corporations converting to C corporations. (1) For an "eligible terminated S corporation," any adjustment required by this section because of its switch from S to C corporation status must be spread evenly over six tax years, starting with the year of the change. (2) An "eligible terminated S corporation" is a C corporation that: was an S corporation the day before the Tax Cuts and Jobs Act became law, and revoked its S-corporation election within two years after that law's enactment; and whose stock is owned by the same owners, in the same proportions, on the date of the revocation as on the date the law was enacted.