Methods of Accounting Elected versus Methods Actually Employed

Method of accounting is determined by method actually used, not a box on a form. So, if cash has been used you are not permitted to use accrual.  DSB&Co attaches an explanation when correcting Box H, accounting method, without Form 3115, Application for Change in Accounting Method.

Example:

TAX ELECTION:
On the initial return filed for the year ended December 31, 201X, on Line H, accounting method, the Accrual box was checked, although the cash method was actually used. In 201X, there was no actual _________________ operations, as it was in the _____          _____ phase. The current return, for the
year ended December 31, 201Y, continues to follow the cash method used in 201X.

AUTHORITY:
Treasury Decision 2433, Jan. 8, 1917, "This ruling contemplates that the income and authorized deductions shall be computed and accounted for on the same basis and that the same practice shall be consistently followed year after year."

In Aluminum Castings Co. v. Routzahn, 282 U.S. 92, the Supreme Court said: "But whether a return is made on the accrual basis, or on that of actual receipts and disbursements, is not determined by the label which the taxpayer chooses to place upon it."

Just the Opposite Can Be True Too:

Likewise, if the entity's balance sheet includes some accrual basis items form two or more years even though "cash basis" was selected, that is likely a fatal error causing a more complex hybrid accounting method increasing taxable income, tax and requiring more costly accounting and tax preparation services.

In your CPA firm's experience, what is the most material overlooked deduction in the estate, gift and trust income tax area

If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, P.C.

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