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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
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Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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accounting question

Customer Question

which is form is used to request to change from cash to accrual from the IRS. The biggest probelm we have is as follows, I will pay another $20 for the answer....
we have a vacation rental business, it is currently on a cash basis, LLC, when a customer makes a reservation they sign a contract and pay 50% on that day. teh reservation may not be for months in the future. i beleive we would be better in the long run for reporting and cash flow projections to record the entire sale at the day the contract was signed and show teh balance as a receivable. we would pay the GE/TAT taxes in full the month teh contract was signed..do you agree with this, or is the sale not official until the guest actually stay in the place?

Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

To change an accounting method with the IRS, use Form 3115.


If you change to the method that you have described, you are going to be paying income tax on money that you will not receive until the future and, potentially, never. For example, the 10 customers book a reservation today for a total of $2,000 each or $20,000 and they each pay 50% = $10,000. The reservations are for next spring - say March 2006. Under your proposed scenario, you will be paying income tax on the $10,000 that you have not yet received when you do your tax return for 2005.


There are benefits to using the accrual method, but there are also drawbacks and once you change, you will not be able to change back without IRS permission.


Proceed with caution.


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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Jon,
the main issue is when does the IRS consider a sale, income if you are on the accrual method, when you create the invoice or when you actually get paid?
regardless of the double-tax issue, do you feel a C corp is better structure thans an LLC?
Expert:  Jon Andrews replied 11 years ago.

If you are on the accrual method and record the entire sale at the time the contract is signed, that is when the income is recognized rather than when you get paid. If you are using the cash method, you would have income only when you get paid.


The question of C corp vs LLC is a completely different issue. The proper selection would depend on what you are trying to accomplish by using the entity. The LLC form will allow for greater flexibility and flow through of income to the owners. The C corp allows for certain expenses to be deductible that are not deductible to the LLC, but potentially subjects the owners to double taxation when they want to take money out of the entity.


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