California nonconformity change of accounting to cash method small business

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Message Board California nonconformity change of accounting to cash method small business

This topic contains 4 replies, has 3 voices, and was last updated by Lynn Freer 1 month, 1 week ago.

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  • #147923
    Anonymous

    On a client’s federal return, we’re changing accounting method from accrual to overall cash method for small business taxpayer.  We are having difficulty with entries to our tax software to adjust the California return back to accrual basis.  We get a diagnostic that federal ordinary income must be the same on the federal and California returns in order to e-file the California return.  However, federal ordinary income is cash basis, and our software will not let us override and adjust California ordinary income back to accrual basis on an e-filed return.

    If we set up two separate client files in the tax software, one for federal and one for California, we still seem to have circular entries when we try to adjust California back to accrual basis.  (It seems that federal ordinary income has to go back to accrual basis on the California return to make it work?)  Please advise.

  • #148090
    Lynn Freer
    Participant

    I would suggest extending the CA return. It is likely we will get conformity beginning in 2019, with a way to make the adjustment in 2018. We’ll send flash emails and include in podcasts if/when it happens. We’re hoping for late June

  • #148091
    Lynn Freer
    Participant
  • #151091
    Jen Horton
    Participant

    So this is very much along the same lines as my question.  My client has always filed as a Cash Basis taxpayer and he’s not close to the $25M floor for 2018.  I WAS going to change him over to accrual both federal and California because of California’s non-conformity.  When I went to complete the 3115 on the federal side, the automatic change code was no longer valid; and that’s what I was coming here to ask.

    So when you suggest we may get conformity in 2019, do you believe California will raise it’s floor to $25M and is it possible that will be retroactive for 2018?

    It sounds like I need to complete the federal return as Cash Basis, and wait until California comes out with instructions before I know whether California will be Cash or Accrual?  Gross receipts are $10.4M.

    And it sounds like preparers file federally as Cash Accounting and California as Accrual Accounting for businesses inbetween the two taxation floor amounts?  ($2M and $25M)

    I feel like I’m doing this tax return twice, and that feels so wrong.

    Aye Aye Aye – isn’t taxation a wonderful venue!  If you wouldn’t mind giving me your thoughts on my statements – am I understanding it correctly?

  • #151101
    Lynn Freer
    Participant

    If we have conformity it may not be retroactive. They are trying to find a way to make it retroactive but I would extend the CA return and decide what to do after the governor’s budget is enacted. (The conformity will likely be in the budget.)