Question

In 2017, your client, Clear Corporation, changed from the cash to the accrual method of accounting for its radio station. The company had a positive § 481 adjustment of $2.4 million as a result of the change and began amortizing the adjustment in 2017. In 2018, Clear received an offer to sell the assets of the radio station business (this would be considered a sale of a trade or business under §1060). If the offer is accepted, Clear plans to purchase a satellite television business. Clear has asked you to explain the consequences of the sale of the radio station on the amortization of the §481 adjustment.

Answer 1

Answer:

An accounting method change may involve switching from one permissible method to another or from an impermissible method to a permissible one. A change in an entity's accounting method is a change in its overall plan of accounting for gross income or deductions (cash or accrual methods), or a change in the treatment of a material item. Such changes may have a positive impact or negative impact on the taxable income. Such adjustment needs to be adjusted over a period of four years including the period of change. A positive adjustment would result in increase in taxable income and negative adjustment would result in reduction in taxable income. It involves adjustment uniformly over four tax periods. In the present context. However, in the present context the assets of Clear corporation pertaining to radio station are sold under section 1060 in 2018. As per the applicable rules if a taxpayer ceases to engage in the business to which section 481 adjustment is applicable the unadjusted amount should be adjusted in the taxable year of such cessation and cannot be spread over the remaining four years. Hence any unadjusted amount should be adjusted in year 2018 and cannot be spread over the balance two years.