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Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 2855
Experience:  18+ years of experience in tax preparation; 25+ years of experience as a real estate/corporate paralegal.
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When a 's' corp attains a 3 year average of revenues is it

Customer Question

when a 's' corp attains a 3 year average of revenues is it required to change from cash-based reporting for taxes to accrual base?
Submitted: 2 months ago.
Category: Tax
Expert:  Barbara replied 2 months ago.

Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

Revenue procedure 2000-22 allows any company that meets a sales test to use the cash method of accounting for tax purposes. This includes sole proprietors, partnerships, S corporations and regular corporations. If a taxpayer meets the sales test, it no longer matters whether it is selling merchandise that is a “material income-producing factor” (discussed below).

To compute the sales test, a company averages revenue from the last three years. If the average is less than the $1 million threshold, the cash method is always allowed (but not required). For purposes of this test gross receipts include most normal items, such as sales revenue, services, interest, dividends, rents, royalties and the like, but not sales tax the taxpayer collects.

Note that Rev. Proc. 2002-28 allows a taxpayer engaged in activities (except certain mining, manufacturing, wholesale trade, retail trade, and information industries) with average annual gross receipts of $10 million or less to use the cash method and to account for inventory as nonincidental materials and supplies—if Sec. 448 does not prohibit the taxpayer from using the overall cash method.

The following links contain the above information as well as additional information you will find helpful:

http://www.journalofaccountancy.com/issues/2001/may/cashoraccrual.html

http://www.thetaxadviser.com/issues/2013/jun/clinic-story-11.html

Please let me know if I can assist you further.

Thank you and best regards,

Barb

Customer: replied 2 months ago.
The references provide some insight but don't answer the question. Is an "S" corp. reaches an average annual revenue in excess of $10mm, is it required to switch from cash to accrual for tax reporting? There appear to be some exemptions but not clearly stated but otherwise it seems that the conversion is needed, The Company is a service company in the education, training, coaching industry. Does that help in getting more clarity?
Expert:  Barbara replied 2 months ago.

Thank you for the additional information.

Average annual revenue IN EXCESS of $10 million would require the S corporation to switch from cash to accrual.

http://loopholelewy.com/loopholelewy/01-tax-basics-for-startups/accounting-methods-02-cash-method-rev-proc-2002-28-1.htm

Please let me know if I can assist you further.

Best regards,

Barb

Expert:  Barbara replied 2 months ago.

Just following up with you to see if you have any other questions. If so, please let me know, and I will be happy to continue to assist you.

Best regards,

Barb

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