Final answer:
The 481 adjustment is a provision in the U.S. tax code that accounts for differences when a taxpayer changes their accounting method. The adjustment can be positive or negative, depending on whether the change increases or decreases taxable income. It helps maintain consistency and spread adjustments over time.
Step-by-step explanation:
The 481 adjustment refers to a specific provision in the U.S. tax code that applies when a taxpayer changes their accounting method. It is named after Internal Revenue Code (IRC) Section 481. The adjustment is used to account for any differences between the old method and the new method, ensuring a smooth transition without distorting the taxpayer's income or expenses.
If the change in accounting method increases taxable income, the 481 adjustment is positive. On the other hand, if the change results in a decrease in taxable income, the 481 adjustment is negative. This adjustment helps to maintain consistency in reporting income and ensures that any adjustments are spread over some time to prevent sudden large changes in tax liability.
For example, if a company changes its inventory valuation method from FIFO to LIFO, and this change increases their taxable income, then the 481 adjustments would be positive.