Using accrual method for S-Corp bookkeeping but filing taxes with cash method - is that allowed?

Thanks for the info! Quick follow-up - if we've been using accrual for our internal bookkeeping and on previous tax returns, and now want to switch to cash for taxes only, is there a specific way we need to handle things like accounts receivable that were already counted as income under accrual but wouldn't be under cash until received? Also, is Form 3115 something a regular tax software can handle or should we definitely hire a professional for this?

For the transition from accrual to cash, you'll need to make a "Section 481(a) adjustment" which accounts for those timing differences. For example, your accounts receivable that were already included in income under accrual but haven't been received yet would be a negative adjustment (reducing your taxable income in the year of change) because these amounts shouldn't be taxed again when you actually receive the cash. I would strongly recommend hiring a professional for this. Form 3115 is complex with multiple sections and calculations. Most consumer tax software doesn't handle this form well, and mistakes can trigger IRS scrutiny. A tax professional with S-Corp experience will make sure the transition is properly documented and the 481(a) adjustments are calculated correctly.

That sounds promising! Did they help with the actual filing process too or just give you the form? I'm concerned about messing up the actual submission since I've heard Form 3115 has specific filing requirements.

I'm a bit skeptical of these online services. How detailed was their analysis for your specific situation? Did they consider things like inventory methods or any other accounting method changes besides just accrual to cash?

They provided me with the completed Form 3115 that I could review, modify if needed, and then file. They also gave clear instructions on the proper filing procedure - you need to attach the original to your timely filed tax return and send a copy to the IRS National Office in Covington, KY. They walked me through the whole process. Their analysis was surprisingly thorough. They asked about inventory methods, accounts receivable aging, prepaid expenses, and even reviewed our financial statements to identify all potential method changes that might be affected. They specifically flagged some prepaid insurance policies we had that needed special attention during the transition.

How exactly does this service work? Do they just hold your place in line or something? Seems strange the IRS would work with a third party for callbacks.

Yeah right. There's no way this actually works. The IRS doesn't just call people back because some service asks them to. You probably just got lucky with the timing.

They use an automated system that navigates the IRS phone menu and waits on hold for you. When they reach an agent, they connect the call to your phone. So it's not that the IRS is working with them - the service is just handling the hold time for you so you don't have to waste hours with your phone on speaker. It's pretty genius actually. They navigate through all the menu options based on what you're calling about, wait through all the hold time, and then when an actual human at the IRS picks up, your phone rings and you're connected to the agent. I was skeptical too but it literally saved me hours of frustration.

That's a great point I hadn't considered! Our business tends to carry significant accounts receivable (we bill large projects in phases), but we don't have many prepaid expenses. Would that generally mean the cash method could be more beneficial for us since we'd only recognize income when we actually receive payment?

Yes, that's exactly the kind of situation where cash method could be advantageous. If you bill in phases and carry significant receivables, using cash method means you only pay tax when you actually receive payment rather than when you send the invoice. This can be especially helpful for businesses with longer collection cycles or those where customers don't always pay immediately. Just make sure you model the change using your actual numbers so you can see the true impact, including the one-time adjustment in the year of change.

I tried doing this with QuickBooks last year and it was a disaster. QB doesn't have good support for Form 3115. I ended up having to get professional help anyway after spending hours trying to figure it out. Save yourself the headache and just hire someone who knows what they're doing for this specific form.

This is incredibly helpful, thank you! I'm new to managing S-Corp taxes and this whole thread has been eye-opening. The 4-year spread option you mentioned is something I hadn't heard about before - is there a specific threshold where this becomes available, or can any S-Corp elect to spread the 481(a) adjustment over 4 years? Also, when you say "template for future filings," do you mean that once you switch to cash method you might need to file Form 3115 again in subsequent years, or just that the initial filing creates documentation you can reference later? I'm definitely leaning toward getting professional help after reading everyone's experiences here, but I want to understand the full scope of what I'm getting into before I start calling around for quotes.

Great question! The 4-year spread (technically called the "4-year spread election") is available when your positive Section 481(a) adjustment is more than $3,000. There's no upper threshold - any S-Corp can elect this if their adjustment exceeds that amount. You make the election by checking the appropriate box on Form 3115 and including a statement with your return. By "template," I meant the documentation and calculations from your initial Form 3115 filing. Once you successfully switch to cash method, you typically won't need to file another Form 3115 unless you want to change methods again or the IRS requires it for some reason. The initial filing establishes your new accounting method going forward. When getting quotes from professionals, ask specifically about their experience with S-Corp accounting method changes and Section 481(a) adjustments. Some preparers are great with regular S-Corp returns but haven't dealt with Form 3115 much. You want someone who can walk you through the long-term implications of the switch, not just fill out the form correctly. Also consider asking how they handle the bookkeeping reconciliation between your accrual books and cash tax returns going forward - that ongoing difference can create confusion if not properly managed.

Great question about timing! You can absolutely make the accounting method change effective for 2025 even though we're partway through the year. The change is effective for the entire tax year, not from the date you file Form 3115. So if you file it with your 2025 return, the cash method applies to all of 2025. However, there's an important deadline to keep in mind - Form 3115 must be filed with your timely filed return (including extensions) for the year of change. So for a 2025 change, you'd need to file it with your 2025 S-Corp return by the due date. For the ongoing reconciliation between accrual books and cash tax returns, I set up a simple Excel worksheet that tracks the key differences each year: accounts receivable, accounts payable, prepaid expenses, and accrued liabilities. At year-end, I calculate the book-to-tax differences and use those to prepare the tax return. It's actually not as complicated as it sounds once you get the system set up. The key is being consistent with your tracking method so you don't accidentally double-count or miss items when preparing your returns. Most S-Corp tax software can handle the book-to-tax reconciliation once you input the differences.

This is such an important point that I wish someone had mentioned when I was considering this change! We're a consulting firm with Net-30 payment terms, and I can already see how this could create major cash flow planning issues. Quick question - did you end up adjusting your estimated tax payment schedule to be more frequent (like monthly instead of quarterly) to smooth out the volatility? Or did you just build larger cash reserves to handle the uneven quarters? Also, regarding the payroll/distribution planning - do you now base your owner distributions on cash tax income rather than book income to avoid getting caught short when tax bills come due? I'm trying to think through all these operational changes before we make the switch.