Sandstone, Inc., has consistently included some factory overhead as a current expense, rather than as a cost of producing goods.As a result, the beginning inventory for 2012 is understated by $40,000.If Sandstone voluntarily changes accounting methods effective January 1, 2012, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2012, 2013, 2014, and 2015.

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According to § 481 of the Internal Revenue Code, any adjustment to taxable income resulting from a change in accounting method must be spread over four years, with equal amounts added to taxable income for each of those years. In this case, since Sandstone is switching from understating factory overhead as a current expense to properly allocating it as a cost of producing goods, the positive adjustment to beginning inventory will result in a § 481 adjustment requiring $10,000 to be added to taxable income for each year 2012 through 2015.