ACME Partnership has had the following gross receipts since its formation: $1.8

Question

ACME Partnership has had the following gross receipts since its formation: $1.8 million in 2014, $4.6 million in 2015, $8.8 million in 2016, $1.6 million in 2017, and $10 million in 2018. Partner Meile, Inc. is a Subchapter C corporation. In what tax years must ACME use the accrual method?

2017 and all following years, because average annual gross receipts are more than $5 million in 2016.

2014 and all following years, because it has a partner that is a Subchapter C corporation.

2016 and all following years, because gross receipts are more than $5 million that year.

2016 and 2018 because those are the only years in which gross receipts exceeded $5 million.

2017 and 2019 because those are the only years in which the prior years’ gross receipts exceeded $5 million.

2017 and all following years, because average annual gross receipts are more than $5 million in 2016.

2014 and all following years, because it has a partner that is a Subchapter C corporation.

2016 and all following years, because gross receipts are more than $5 million that year.

2016 and 2018 because those are the only years in which gross receipts exceeded $5 million.

2017 and 2019 because those are the only years in which the prior years’ gross receipts exceeded $5 million.

Explanation / Answer

Solution:

As per tax provisions, "C corporations and partnerships with a corporate partner may use the cash method only if their average annual gross receipts for the three preceding tax years do not exceed $5 million"

In the given case average turnover from 2014 to 2016 = ($1.8 + $4.6 + $8.8)/3 = $5.07 million > $5 million

As average turnover of 3 year exceeds $5 milllion therefore ACME must use accural method in 2017.

As per provisions, "A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test."

Therefore in 2017 partnership fails to meet the gross receipt test, therefore Accural method to be used for 2017 and following years.

Hence option a is the right choice.

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