S-Corp

gains control over a liquidity problem through accounting method changes

Client Description

A New England-based commercial client who operates a nationwide logistics and distribution company, operating as an S-Corporation

Problem

During the struggling economy, the company was experiencing significant liquidity problems due to slowing collections. The company was filing its tax returns using the accrual basis of accounting, which meant that the company’s owners had to pay tax on income that had not been received in cash. The company’s previous provider insisted that the accrual method was the only method available under the circumstances, but we raised the possibility of using the cash method. It would allow the owners of the company to pay tax only on the cash income received.

BerryDunn’s Solution

BerryDunn experts worked with our client to:

• Research the availability of a switch to the cash method
• Discovered a special rule that would allow taxpayers in the client’s specific industry to change its accounting method to cash basis for tax purposes, with automatic IRS approval
• Met with the client’s ownership group to discuss the benefits and risks associated with a change to the cash method
• Prepared and filed the method change documents with the IRS

Outcomes 

During the year of the change, the client’s owners received >$200,000 of previously remitted taxes. The client continues to defer tax under the cash method, which lowers annual taxes significantly from what they would have been without the method change.