Edgar uses the cash method to report the income from his software consulting business. A large publicly held corporation has offered to invest in Edgar's business as a limited partner. What tax accounting complications would be created if Edgar and the corporation became partners?

Question

Leonard Herring

Business

28 August, 10:57

Edgar uses the cash method to report the income from his software consulting business. A large publicly held corporation has offered to invest in Edgar's business as a limited partner. What tax accounting complications would be created if Edgar and the corporation became partners?

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Answers (1)

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Elise Russell · Answer 1

If Edgar decides to become partners with the corporation, he'll need to change from cash method to the use of accural method.

Explanation:

If Edgar engages with this large publicly held corporation in a limited partnership, he will have to change from the cash method and use the accrual method of accounting.

The use of the cash method by corporations isn't allowed by IRS and the accrual method is needed to report income earned for Federal income tax purposes to ensure proper and precise reflection of annual income.

In the cash method, Edgar will not currently recognize income until it is actually received. While under the accrual method Edgar would recognize income when it is earned, irrespective of when the income is to be collected.