Common use of Change in method Clause in Contracts

Change in method. X is a C cor- poration using an accrual method that elects to become an S corporation effective Janu- ary 1, 1996. In 1995, X received $5,000 for serv- ices to be rendered in 1996, and properly in- cluded the $5,000 in gross income. In 1996, X properly elects to include the $5,000 in gross income in 1996 under Rev. Proc. 71–21, 1971–2 C.B. 549 (see § 601.601(d)(2)(ii)(b) of this chap- ter). As a result of the change in method of accounting, X has a $5,000 negative section 481(a) adjustment. Under paragraph (b)(1) of this section, the $5,000 included in gross in- come in 1996 is recognized built-in gain be- cause it would have been included in gross income before the beginning of the recogni- tion period by an accrual method taxpayer using the method that X actually used before the beginning of the recognition period. In addition, the $5,000 negative section 481(a) adjustment is recognized built-in loss be- cause it relates to an item (the $5,000 X re- ceived for services in 1995) attributable to pe- riods before the beginning of the recognition period under the principles for determining recognized built-in gain or loss in this sec- tion. See paragraph (d) of this section for rules regarding section 481(a) adjustments.