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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I have been using TurboTax for years but encountered an investment situation that TurboTax is not designed to handle. After searching the web for local CPAs/Accountants and chatting with a couple on the phone I was unable to find someone locally with sufficient experience in my particular situation with whom I felt comfortable. Deciding to broaden my search beyond my local area I discovered Gary's website and a detailed discussion with options pertinent to my situation. During a brief phone conversation, Gary answered all of my questions, explained how we would exchange information online and gave me an estimate for preparing my current tax return and an amended return. It was a pleasure working with Gary. He delivered everything he promised with no surprises.

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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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