"Shagnasty" <Shag[at]nospam.com> wrote:
- quote -

Good point. Example: If the receivables exceed the payables
by $100,000, the change reduces current taxable income by
$100,000. Assuming a 40% tax rate, the reduction in tax paid
will be $40,000. Therefore, the advantages is the one year
time value of having $40,000.

One other point. If the Company experiences a large amount
of growth, the benefit of the cash method increases. For
example, if the year two receivables exceed payables by
$150,000. The year one income is reduce by $100,000 and the
year two income is reduced by $50,000 (the incremental
increase).

Regarding the accrual method, you may want to determine if
any methods can be used to reduce income or accellerate
deductions. Are there any advance payments that are being
reported as received that can be deferred? See Rev. Proc.
71-21 for services and section 1.451-5 for inventory advance
payments. Can the non-accrual experience method be used to
in affect take a bad debt deduction?

If the company is a C Corporation, you may want to consider
a change in tax year to a point in time that has little
activity.

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"Richard Garrett" <LIFOMAN472[at]hotmail.com> wrote:
- quote -

There is very little advantage to switching. Any income you
defer by using the cash basis will be income next year
instead of this year.

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<JFOREMAN10[at]houston.rr.com> wrote:

- quote -

Once the accrual method is adopted, IRS prior approval is
needed to change to the cash method. See section 446(e).
Permission is requested by filing a Form 3115, Application
For Change in Accounting Method. There are two types of
changes: (1) a prior approval change, and (2) an automatic
change. Automatic changes to the cash method are allowed for
certain small taxpayers. See section 5.05 of Rev. Proc.
2002-9 and Rev. Proc. 2001-10. The automatic change is made
by attaching the Form 3115 to a timely filed return and
sending a copy to the IRS National Office. If the change
cannot be made automatically, it must be made with IRS prior
approval using Rev. Proc. 97-27. Prior approval changes are
filed with the IRS National Office by the last day of the
year of change. A user fee must be paid. The IRS National
Office will then review the application to determine whether
it will grant the change. This often takes from 6-12 months.
The IRS National Office rarely grants taxpayers permission
to change to the cash method, even if they could have
adopted the cash method.

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We have been an accrual company since inception. We are a
small company that normally pays out all net income to the
owners at the end of the year and thus have little if any
corporate taxes. However, we are starting to see our
receivables increase and thus we have income to the company
but have not received the cash to pay out. So we will owe
corporate income taxes.

Is it possible to switch to the cash method for tax
purposes. Any other ideas?

Thanks in advance,

James

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