Erin is considering switching her business from the cash method to the accrual m

Question

Erin is considering switching her business from the cash method to the accrual method at the beginning of next year (year 1). Determine the amount and timing of her §481 adjustment assuming the IRS grants Erin's request in the following alternative scenarios. a. At the end of year 0/beginning of year 1, Erin's business has $22,100 of accounts receivables and $27,800 of accounts payables that have not been recorded for tax purposes. b. At the end of year 0/beginning of year 1, Erin's business reports $34,400 of accounts receivables and $15,100 of accounts payables that have not been recorded for tax purposes.

Explanation / Answer

1. The business has higher unrecorded payables than receivables. In such case IRS would allows adjutment of $22100 for receivables as well as payables as change in process should increase the taxable income.

2. The entire amounts of receivables and payables will be allowed as adjustement as the change leads to increase in taxable revenue.

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