Cash Basis S-Corp Balance Sheet

[JohnH]

I think this may be the first time I've ever run across this, or else my brain isn't working so well today (which is entirely possible). This S-Corp has been reporting on the cash basis for 8 years or so, and gross receipts & assets were below $250K so no balance sheet is required. This past year they kicked up over $250 in gross receipts, so I need to fill in the balance sheet info.

I'm thinking I just enter the balance sheet info on the accrual basis and then use the M-1 to reconicle income per books with income per return. Is it OK to just do a single-line entry on line 5 and call it "Cash vs Accrual Basis Adjustment" & call it a day, or should I go into more detail?

[Snaggletooth]

What I do

What I do (and that doesn't make it necessarily wise) is to focus on the elements of the schedule M-1. The cash/accrual differences should fall neatly into these categories:

1. Revenue on accrual basis not reported on cash basis.
2. Revenue on cash basis previously reported on accrual basis.
3. Expenses on accrual basis not reported on cash basis.
4. Expenses on cash basis previously reported on accrual basis.

If revenue differences are reduced to a single line item, then 1&2 above will be mutually exclusive. 3&4 will encounter the same fate if these differences are reduced to a single line item.

There is a place on M-1 for all such reconciling items. The cash/accrual differences should be merged with other book-to-tax differences such as depreciation and non-timing items. Merging means that the cash/accrual differences will not have a dedicated line on the M-1 all to themselves.

[JohnH]

Somehow I just knew the answer was going to be something along those lines...

[Maribeth]

I think this may be the first time I've ever run across this, or else my brain isn't working so well today (which is entirely possible). This S-Corp has been reporting on the cash basis for 8 years or so, and gross receipts & assets were below $250K so no balance sheet is required. This past year they kicked up over $250 in gross receipts, so I need to fill in the balance sheet info.

I'm thinking I just enter the balance sheet info on the accrual basis and then use the M-1 to reconicle income per books with income per return. Is it OK to just do a single-line entry on line 5 and call it "Cash vs Accrual Basis Adjustment" & call it a day, or should I go into more detail?

If you S-corporation was on a cash basis for the last 8 years, then they are still on the cash basis for this year. The requirement for reporting a balance sheet on a tax return does not change the method of accounting. Report the balance sheet on the cash basis. You may still have M-1 differences, say for depreciation, but the balance sheet should as per the books as of the last day of the year.

Maribeth

[JohnH]

Now that's an intersting twist. I just assumed the balance sheet should be based on an accrual basis, since I see a cash-basis balance sheet as something worse than useless - almost a contradiction in terms.

But maybe you're onto something here - do you know of any IRS guidance on the subject? I haven't been able to find much form their perspective dealing with what happens when a taxpayer crosses the magic $250K line.

[Maribeth]

Now that's an intersting twist. I just assumed the balance sheet should be based on an accrual basis, since I see a cash-basis balance sheet as something worse than useless - almost a contradiction in terms.

But maybe you're onto something here - do you know of any IRS guidance on the subject? I haven't been able to find much form their perspective dealing with what happens when a taxpayer crosses the magic $250K line.

Start with the Tax Book - Small Business edition - pages SB8-8 and on. You are dealing with oranges and apples here. The requirement of reporting a balance sheet (or really any other item on a tax return) does not change the method of acquiring that information.

Maribeth

[geekgirldany]

because most of my customers use quickbooks and most are cash basis then I report the balance sheet on cash basis also. I've never shown any adjustments re doing the balance sheet on accural basis even though they are on cash basis.