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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Which accounting method for S corp revenues?
Tax Talk

Cash or accrual accounting?

Dear Tax Talk,
Can an S corp with revenues in excess of $5 million elect to use a cash accounting method if it is not a service company and maintains a significant inventory?
-- Steven

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Dear Steven,
There are generally two types of accounting methods available to taxpayers: cash or accrual. Under the cash method, income is not taxed until cash is received and expenses are not deducted until paid.

The accrual method differs, as income is recognized when invoiced and expenses are deducted when incurred. Most individuals and many small businesses use the cash method of accounting, unless otherwise precluded. Generally, if you produce, purchase or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise.

For example, wholesalers, retailers and manufacturers are required to use the accrual method. Doctors and dentists can use the cash method even though they may have inventory, as these items are considered supplies.

An S corporation can use the cash basis method of accounting if it does not have inventory, regardless of its sales. A conventional corporation that is neither an S corporation nor a qualified personal service corporation is disqualified from using the cash basis method of accounting if its sales exceed $5 million.

IRS Publication 538 discusses accounting methods, including limitations on the cash basis method of accounting. However, the discussion on the limitations of the cash basis method can be confusing. Actually, I found Code Section 448 to be more straightforward than the publication.

Bankrate.com's corrections policy -- Posted: July 31, 2008
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