Message Board › Accrual to Cash
- This topic has 5 replies, 4 voices, and was last updated 1 month ago by Diane White.
May 27, 2020 at 3:24 pm #249806Gino GalanteParticipant
We are preparing an accrual to cash conversion for one of our clients and wanted to confirm something. The client is a manufacturing client and has Finished Goods, Work-in-Process, Raw Materials and has prepaid/deposits purchases. We want to confirm if all four of these get reversed when doing the accrual to cash conversion? Code Section 471 indicates inventory is treated as non-incidental materials and supplies. Included in the the Spidell Update Seminar materials page 4-45 of the 2018/2109 book – the comment in parenthesis says (which are deducted in the year used or consumed) does this somehow indicate the Raw Materials and/or Work in Process are not converted? We could find nothing in the law that indicates these items would not be reversed?
Is this a gray area of the law?
May 28, 2020 at 10:01 am #249926Diane WhiteParticipant
According to Reg 1.471-1 inventory includes finished or partly finished goods, and raw materials and supplies which have been acquired for sale or will physically become part of the merchandise for sale. Inventory does not include sold merchandise that has not yet been delivered. If your client does not qualify for the ability to use the cash method of accounting for inventory pursuant to the TCJA then all of the above will be reversed for the accrual/cash conversion. Deposits are not included in inventory per se as title to the purchased goods has not yet passed to your client and the goods are not in their physical possession.
May 28, 2020 at 12:00 pm #250020William DewberryParticipant
Inventory costs have not gone away; if the costs meet the definition on non incidental materials and supplies, which i believe yours would, they are deductible the later of when sold or paid for. What has gone away is the capitalization into inventory of overhead and labor, the former 263A costs, now its just hard costs.
May 28, 2020 at 12:24 pm #250040Paul MockerParticipant
“If your client does not qualify for the ability to use the cash method of accounting for inventory pursuant to the TCJA then all of the above will be reversed for the accrual/cash conversion. ”
I’m hung up on “not”.
Let’s see if I understand. If the client qualifies for the cash method, then inventory can be currently deducted. Therefore, an accrual basis taxpayer will reverse inventory for accrual/cash conversion.
Is that right?
June 2, 2020 at 9:41 am #251968Gino GalanteParticipant
Diane – thank you for your response – I just want to make sure I’m clear on your response. To summarize our client is under the $25 million dollar threshold and qualifies for the use of the cash method. So in this case, when we go from the accrual method to cash method we reverse all Inventory items including Raw Materials, Work in Process and Finished Goods. Just want to make sure I’m on the same page with this.
Thank you again for your attention to this matter.
June 2, 2020 at 10:47 am #252032Diane WhiteParticipant
You’re welcome. If you are maintaining inventory and related items as assets on an accrual based Balance Sheet, then yes they are reversed to a Cost of Goods Sold or similar expense account when converting to cash basis.