Accrual Method

Technical topics regarding tax preparation.
#1
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S-corp client is accrual for tax reporting. Prior to 2020 they tracked A/R but didn't track A/P. With covid and getting massively behind on paying bills, they are now tracking A/P. Can I take the A/P on the tax return? Or would this be considered a change in accounting method and I should back the A/P out?
 

#2
JR1  
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I'll assume that what you meant to say is that AP was incidental in the past so it wouldn't have mattered. Now it does. So yes, take it, you're not changing anything, just now measuring what you didn't.
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#3
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The right answer, to which you allude, is that this is a change from an impermissable method to a permissable method and a F3115 should be filed. However, this could likely be justified as simply correcting an error and forego the 3115. If the dollars not accounted for at 12/31/2019 are rather small, I'd probably just drop it on without further ado.
~Captcook
 

#4
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Thanks. I don't know how incidental it was in the past as it wasn't tracked. I just know it went way up which led to it being tracked.
 

#5
Coddington  
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Try to have them figure it out as of 2020 year-beginning. If it is reasonably close to the same result as using the cash method for expenses, (look to the substantial identity of results case law), advise them of the technically correct way to handle (Form 3115), and consider disclosing if you don't believe the substantial identity of results has substantial authority in their situation. Otherwise, I think there is a foot-fault cash to accrual for a single item automatic change.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#6
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They may not have had A/P in prior years.
 

#7
eze  
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JR1 wrote:I'll assume that what you meant to say is that AP was incidental in the past so it wouldn't have mattered. Now it does. So yes, take it, you're not changing anything, just now measuring what you didn't.


I like this answer.
 


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