Statutorily mandated changes from cash to accrual.

• Author: Howe, Vicki

Most C corporations are required to use the accrual method, either because they have inventories or because Sec. 448 requires the use of the accrual method. Sec. 448 requires C corporations with gross receipts in excess of $5 million (other than personal service corporations), partnerships with C corporations as partners, and tax shelters to use the accrual method. S corporations, partnerships without C corporations as partners and C corporations with rcceipts less than $5 million may use the cash method, assuming they do not have inventories and are not tax shelters las dcfined under Sec. 461(i)(3)).

Method change questions arise in this context when entities that qualified for the cash method lose their qualification, e.g., when a C corporation's receipts grow to exceed $5 million, or a partnership gains a corporate partner. In these situations, the entity makes the method change to accrual by simply attaching Form 3115, Application for Changc in Accounting Mcthod, to the tax return for the first year the entity is required to use accrual. For C corporations that fail the $5 million test, the change is required to be made for the first year for which average annual gross rcceipts for the thrce prior ycars exceed $5 million. For a partnership that gains a corporate partner, the partnership must change to accrual for the year in which it acquires the corporate partner. The Sec. 481(a) adjustment is required to be spread over four ycars (unless the cash method was used for a fewer number of years, in which case the adjustment is spread over the number of years the method was used). The build-up rule of Rev. Proc. 92-20 does not apply.

Therc is one catch, however...