Question

Which of the following statements is always true regarding accounting methods available to a partnership?

a.         If a partnership is a tax shelter, it cannot use the cash method of accounting.

b.         If a non-tax-shelter partnership had “average annual gross receipts” of less than $26 million in the three years immediately preceding its calendar 2018 taxable year, it can use the cash method in 2018.

c.         If a partnership has a partner that is a personal service corporation, it cannot use the cash method.

d.         If a partnership has a partner that is a C corporation, it cannot use the cash method.

e.         If a partnership acquires trade accounts receivable in connection with the transfer of a business to it from a cash basis partner, it must use the cash basis of accounting.

Answer 1

True statement

If a partnership has a partner that is a C corporation, it cannot use the cash method.

Explain some points

In general, a partnership cannot elect the cash method of accounting in the following circumstances:

The partnership has at least one C corporation as a partner; or

The partnership is a “tax shelter.”

However, a partnership (other than a tax shelter) that has a C corporation as a partner

can nonetheless elect the cash method if:

(i) the partnership is engaged in the farming business,

(ii) the C corporation partners are “qualified personal services corporations”1 or

(iii) the partnership satisfies the $5 million average annual gross receipts test.2

These exceptions notwithstanding, every partnership that is a tax shelter must be on the accrual method of accounting.