Question

Your client has asked you to research, if his newly formed Corporation can use Cash or Accrual method of accounting. Briefly describe the accounting methods available for adoption by a C corporation. Please write at least one paragraph consisting of minimum 6 lines on this technical issue.

Answer 1

For Federal income tax purposes, a regular or subchapter C Corp must identify its accounting method as either CASH or ACCRUAL or OTHER. It can use any method as long as the method reflects taxable income on a consistent basis. Cash- It is the most feasible method for a small taxpayer. Income and expenses are recognized when they are actually received or paid in cash. Expenses can only be claimed as deduction if paid in cash before the year end and the payment is NOT for a long term asset. Accrual- Corporations with Annual Gross Receipts exceeding $5 million MUST USE accrual method. Other methods- A combination of methods can be used on a consistent basis.