Accrual enough to change to cash? (DCN 233)

Technical topics regarding tax preparation.
#1
MLI  
Posts:
52
Joined:
4-Jun-2014 12:28pm
Location:
Seattle
I am trying to figure out what to do with a mess I have had for a while now.

A client came in a few years ago now. A used children’s clothing store (S corp). They were hybrid basis, and there was a liability on the Sch L - balance sheet for “store credit”. The store credit account represented credits issued to customers in exchange for used clothing they brought in.

I wasn’t sure how to handle this, since a method had been established, but decided an argument could be made for “advanced payment” treatment (an amount received pursuant to an agreement for future sales). I checked the accrual box (was hybrid) and told the client they needed to take into income any credit that hadn’t been claimed by the end of the second year. She has been doing this.

Every year since then, I have held my nose and filed the return. I have made the client aware of potential problems with this position and she isn’t adverse to addressing the issue. I’d like to clean this up, I am just not sure how.

My concern is I am unsure if the client is really even accrual or “accrual enough” to take advantage of the available automatic change procedures. Other than the advance payment (store credit liability), there is not one payable on her books. Also, no receivables, but that isn’t unexpected for retail.

• Could I use DCN 233 to change over to cash basis and take the advance payment liability to income? Does the advance payment treatment alone make her “accrual enough” to make this change?

• Could I use DCN 216 for an accrual method TP to include advance payment in year of receipt? She would have no accrual entries left!!

• She is planning to sell the business in 4-5 years, is it a better option to continue to kick the can forward and let it die.

• The balance in the account isn’t nothing, but it is small enough ($30k) that it would be hard to justify fixing it by paying the $10,800 user fee for a non-automatic method change to correct an improper method (granted that might be all this is).

I would appreciate any thoughts on this.
 

Return to Taxation



Who is online

Users browsing this forum: CaptCook, dellpaul, golfinz, Google Adsense [Bot], HowardS, JAH, JoJoCPA, KoiCPA, lckent, SALYstrikesagain and 213 guests