Hybrid Method

[BOB W]

I have been using a hybrid method of accounting for a client that has inventory (substancial). I have been using accrual up to COGS and cash basis for the rest. This client just crossed $10,000,000 in sales. Does it make a difference, being over $10,000,000?

[Bees Knees]

If you are already accounting for inventory (including accounts payable and accounts receivable) under the accrual method, gross revenues are irrelevant. The services side of the business can use the cash method regardless of the level of gross income collected.

The exceptions to this are C corporations and tax shelters. All tax shelters must use the accrual method, regardless of the level of income generated. All C corporations over $5 million gross receipts must use the accrual method, even if 100% of the business is a service type business with no inventory.

One thing I would be more concerned with for a business over $10 million in gross sales is UNICAP. Since there is a level of inventory involved, you need to add a portion of indirect costs, including operating costs, into inventory. If you are going to have to deal with that, it might be just as easy to have the entire business under the accrual method.

[BOB W]

If you are already accounting for inventory (including accounts payable and accounts receivable) under the accrual method, gross revenues are irrelevant. The services side of the business can use the cash method regardless of the level of gross income collected.

The exceptions to this are C corporations and tax shelters. All tax shelters must use the accrual method, regardless of the level of income generated. All C corporations over $5 million gross receipts must use the accrual method, even if 100% of the business is a service type business with no inventory.

One thing I would be more concerned with for a business over $10 million in gross sales is UNICAP. Since there is a level of inventory involved, you need to add a portion of indirect costs, including operating costs, into inventory. If you are going to have to deal with that, it might be just as easy to have the entire business under the accrual method.

I will review all areas of UNICAP and decide how I can isolate those items for financial and tax purposes. There inventory currently is about $2,000,000.

Thanks Bees.

[BOB W]

I did a review of UNICAP and its main concentration is on manufacturing. My client buys direct from manufacturers and sells wholesale/retail electrical items. They warehouse tens of 1,000s of items to the tune of $2,000,000 at cost as an average inventory.

I have still not found the formula for doing the UNICAP but will look more.

My question is, since they are not manufacturing does UNICAP still apply?

[Bees Knees]

My question is, since they are not manufacturing does UNICAP still apply?

UNICAP applies to wholesalers and retailers when gross receipts exceed $10 million. See TTB page 8-14. UNICAP applies to manufacturing at all levels of income. The only exception for manufacturing is when indirect costs are under $200,000 and the simplified production method is used.