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S Corporation CPA discusses Advance Payments as Income | 2012 IRS Form 1120-S Accrual Method Accounting

S Corporation CPA Form 1120-S

Gary Bode, CPA: our firm is an S Corporation, so  I stay current on Form 1120-S issues. (910) 399-2705.

S Corporation CPAs say paying your taxes later is better than paying them now. Several Form 1120-S accounting methods exist that allow S Corporations to shift advance customer payments to a future year. This shifts the income, and associated tax liability, to a future tax year. These accounting methods include:

  • Accrual method of accounting.
  • Completed Contract accounting method.
  • Percentage of Completion accounting method.

We’ll discuss Form 1120-S accrual accounting using a dance studio that takes payment in advance for dance lessons.

Consult with your own S Corporation CPA before implementing this strategy. Your S Corporation’s accounting method has multiple ramifications. If you don’t have an S Corporation CPA, consider calling us for a free phone consult. Don’t let distance dissuade you; our virtual CPA office makes dealing with us easy.

What is the Accrual Method and how is it Different than the Cash Method?

  • The cash method counts income when it’s received, and expense when it’s paid.
  • The accrual method counts income when it’s earned, and expense when it’s incurred.

Points your S Corporation CPA should consider:

  • Does your S Corporation have enough unearned income to make the accrual method worthwhile?
  • Does your S Corporation have good bookkeeping skills?
  • Tax savings are greatest in the first few years of operations, generally speaking.
  • The S Corporation has to prepare accrual based Financial Statements. Some small S Corporations never prepare any Financial Statements.
  • The accrual method of accounting uses accounting conventions that can make Financial Statements harder to understand.
  • The accrual method of accounting can make cash flow management more difficult.
  • Your CPA will have problems switching accounting methods in the future. IRS Form 3115 is required. Best to choose the ideal accounting method during the first year of operations.

S Corporation CPAs should provide supplemental information with your Accrual Method Form 1120-S

The accrual accounting method is perfectly legitimate. But make sure your S Corporation CPA includes a supplemental Schedule on Form 1120-S covering issues that would otherwise raise audit flags.

“Tax savings in the first year of operations are crucial to cash flow.”
– Gary Bode, S Corporation CPA

When is the accrual method allowed for Form 1120-S?

  • Your CPA elects the accrual method on the first Form 1120-S.
  • Your CPA files Form 3115 to change the current accounting method to the accrual method, and, the IRS approves it.
  • Your S Corporation produces accrual based Financial Statements.

An Example for Advance Payments on an Accrual Method Form 1120-S

  • Your dance studio, an S Corporation, sells pre-paid blocks of dance lessons, say 30 lessons at $20 each, that can be used up to nine months in the future.
  • Plus you sell gift cards for dance lessons.
  • Plus you book the studio out for children’s parties with payment in advance.
  • On December 31st, 2012 your records show pre-payment for 400 lessons not yet given.
  • On December 31st, 2012 there are $1,400 of unredeemed gift cards.
  • On December 31st, 2012 there’s $600 of pre-payment for birthday parties in early 2013.

So, your studio can shift $10,000 of income from 2012 to 2013 using the accrual method of accounting:

  • 400 block sale dance lessons at $20 each = $8,000.
  • $1,400 unredeemed gift cards.
  • $600 for the birthday party.

What are the tax savings are in 2012 for the $10,000? It depends on the S Corporation shareholders, but at a 30% total tax rate, it’s $3,000. A big cash flow consideration, at least in the first year of operations. But of course, the $10,000 never goes away; it has to be declared as income on the 2013 Form 1120-S. Unless you refund some of the advance payments.

I’m an S Corporation CPA that does business as an S Corporation. So I stay abreast on Form 1120-S developments. Our virtual office serves long distance and international clients. Plus it allows greater convenience for our local friends. For a free phone consult, please call (910) 399-2705.

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