How do I figure whether to use Cash or Accrual when I do the accounting/taxes for our Partnership? We flip homes & report expenses when we sell the home on 1 tax return.

[Mark21]

Partnership formed in 2014 and submitted a zero transactions 1065 tax return for 2014.  However, the 2014 tax return stated we used the "Cash" accounting method.  Now that we have transactions in 2015, not sure whether we should state we are using "Cash" or "Accrual?"  Since we recognize the expenses when the home is sold, is this "Cash" or "Accrual?"  Seems like it is sort of both, and yet neither!

Bottomline is twofold:

1. Are we Cash or Accrual?
2. If we are not Cash and had no transactions in 2014, do I need to submit a 3115 to accomplish this?

Thank you for your help!
Mark

[PatriciaV · Accepted solution]

The choice between Cash versus Accrual accounting is a business decision.

Many businesses without inventories use the cash method because it is fairly simple. Farming businesses with gross receipts of $25 million or less, qualified personal service corporations, and entities with average annual gross receipts of $10 million or less, may use the cash method.

On the other hand, if you have inventory, need to track Cost of Goods Sold, and your business earned over $1 million in gross receipts in each of the past three years, you'll generally use the accrual method for sales and related costs.

If you don't have a compelling reason to use the accrual method, you are better served sticking with cash-basis accounting for simplicity, if for no other reason.