New corporation may use cash method even though first year's gross receipts exceed $5 million.

• Author: Kelson, Jeffrey A.
• Position: Brief Article

A C corporation or a partnership with a C corporation partner may use the cash method (unless inventories are required) if, for all prior tax years beginning after 1985, a $5 million gross receipts test is satisfied. (See Sec. 448(b)(3).) The $5 million gross receipts test is met for a prior tax year if the average annual gross receipts for the three preceding tax years ending with that prior tax year do not exceed $5 million.

Accordingly, a C corporation or a partnership with a C corporation partner can never use the cash method of accounting if, even in only a single prior tax year beginning after 1985, the $5 million gross receipts test was not met.

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