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I. Method of Accounting
Section 446(a) provides that “Taxable income shall be
computed under the method of accounting on the basis of which the
taxpayer regularly computes his income in keeping his books.”
The term “method of accounting” includes both the “over-all
method of accounting” and “the accounting treatment of any item.”
Sec. 1.446-1(a)(1), Income Tax Regs. A method of accounting
includes “the consistent treatment of a recurring, material item,
whether that treatment be correct or incorrect.” H.F. Campbell
Co. v. Commissioner, 53 T.C. 439, 447 (1969), affd. 443 F.2d 965
(6th Cir. 1971). A taxpayer changes its method of accounting
when it changes either the “overall plan of accounting for gross
income or deductions” or “the treatment of any material item used
in such overall plan.” Sec. 1.446-1(e)(2)(ii)(a), Income Tax
Regs. A “material item” is “any item which involves the proper
time for the inclusion of the item in income or the taking of a
deduction.” Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500,
510 (1989); sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs. A change
in accounting method may be effected only after consent is
obtained from the Secretary. See sec. 446(e).
“The primary effect of characterizing a payment as either a
business expense or a capital expenditure concerns the timing of
the taxpayer’s cost recovery: While business expenses are
currently deductible, a capital expenditure usually is amortized
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