Cash method used by a medical clinic.

• Author: Fleishman, Bernard K.
• Position: Brief Article

Sec. 446 and the regulations thereunder provide that taxable income is required to be reported under the method of accounting regularly used by the taxpayer in keeping its books. The IRS permits taxpayers to use any allowable method that clearly reflects income: [] Cash receipts and disbursements method. [] Accrual method. [] Any other method permitted by the Code (e.g., completed contract method). [] Any combination of methods permitted by the regulations.

Generally, individuals, trusts, estates, many partnerships and certain corporations employ the cash method of accounting. Under the cash method, taxpayers report items of income in the year actually or constructively received and deduct items of expense in the year paid.

One of the primary advantages of the cash method is its simplicity. However, it frequently does not match income and expense properly, because it does not consider when the income is earned or the expenses incurred. In addition, it is often abused by taxpayers in an attempt to shift income or expenses between high-tax-bracket years and low-tax-bracket years. The Service can require a taxpayer to change accounting methods if the cash method is abused and results in a distortion of income.

In june 1997, the IRS issued Letter Ruling (TAM) 9723006, discussing the impact of inventories of a medical clinic using the cash method of accounting.

The medical clinic used the cash method for both its income tax returns and financial statements. The clinic provided traditional medical services, including the purchase of...