Page 419 - Small Business IRS Training Guides

Analysis of Provision, Section 481

Accrual Method of Accounting

Generally, a C corporation (other than a farming business or a qualified personal service corporation) is prohibited from

using the cash method of accounting unless the C corporation meets the $25 million gross receipts test (as adjusted for
inflation) of section 448(c). Section 448 also prohibits tax shelters from using the cash method.

An S corporation does not have the same requirement. Therefore, if an S corporation converts to a C corporation, it may
have to convert from the cash method to the accrual method of accounting. If the conversion from cash to accrual is

required under section 448 then the corporation is required to report the positive or negative section 481(a) adjustment
ratably over six years. There is no option to report the entire adjustment in the first year. However, if the method change is

not required, but is permissible, then the corporation can choose to report the positive or negative adjustment over six
years or follow the normal method change requirements of immediately or over four years depending upon whether the

adjustment is positive or negative.

An eligible terminated S corporation is any C corporation that:

(1) is an S corporation on December 21, 2017, and

(2) revokes its S corporation election under section 1362(a) during the two-year period beginning December 22,
2017, and

(3) has all the same owners (and in identical proportions) on the date the S corporation election is revoked as on

December 22, 2017.

For additional information, see Rev. Proc. 2018-44.

73233-102 13543-4 Tax Cuts and Jobs Act