Accrual to Cash conversion for tax reporting

[Milsup]

I'll try to be as clear as possible without being too long.

Using QBPro2002

Business is run on accrual and taxes are filed on cash basis.

I'm a pretty simple company

Sales

Cost of Goods

Expenses

About 1/2 mil in A/R A/P at any given time.

I'm filing my own 1120S this year and I have 1 problem where I hope you can help.

I used the information from the cash basis P&L and Balance sheet from QuickBooks to prepare the taxes.

I made the proper adjustments for the minor stuff like health benefits for more than 10% shareholders and other non-deductable expenses.

I didn't think anything was wrong until I looked at last years taxes and realized the Total Income and Total COGS shown on the Quickbooks reports was very different than the amounts reported on Form 1120s Lines 1c and 2.

When I saw this I went back several more years and realized that all the years had major differences in the amounts shown on the Quickbooks reports and the Form 1120s.

All the Quickbooks reports were cash reports.

I have had several tax accountants over the years and I see each one made major adjustments to the "Total Income" (approx $85K last year) and "Total Cost of Goods Sold" (approx $20K last year).

I have gone over and over the books. I have found and accounted for a few small adjustments like prepayments and the like but, I can not identify anything that explains why they made such giant adjustments when transfering the numbers from the Quickbooks reports to the IRS 1120s.

Thanks for reading. Any suggestions or comments are appreciated.

[Terry]

It would be real tough know without looking at it, but I would guess it has something to do with A/R and A/P that shows up on a cash basis balance sheet.

A/R and A/P transactions that post to a balance sheet account (like inventory, notes payable, etc...) will still show up on cash basis balance sheet. Since most cash basis statements don't have A/R or A/P, accountants who don't quite understand QuickBooks will adjust the A/R against sales and the A/P against cost of sales when preparing the tax return.

Look at your balance sheet on QuickBooks and compare it to Schedule L on page 4 of the 1120S to see if they have A/R and A/P listed.

If the balance sheet does agree to QuickBooks, look at your M-1 and M-2 to see if timing differences were reported there.

Also, print your reports for the prior years again and make sure they agree to what you gave the accountant the first time. Its possible your data has changed.

[plg]

1 - Go back to an accountant.

2 - Decide which method you're going to use and make a change. With the amount of AP and AR I can't imagine anything but accrual, but that's up to you (and the IRS).

Go one way or the other and think about why you let it go on the way it is for so long. (Unless you like to make annual donations to accountants.)

[Milsup]

Thanks for the great reply, Terry.

I looked at the Cash Balance sheet and there was $-1700. in Rec'bls and a whopping -31K in payables.

I used the method outlined here http://www.sleeter.com/articles/1034888511 to locate the error in the A/R but that method did not locate the error from A/P.

Although, either way. Those amounts still don't come anywhere near the 80k difference between the amounts shown on my Quickbooks cash reports vs the amounts my tax preparer has shown on the 1120s.

I reviewed the M1 and the only adjustment is owner health insurance. M2 has a loss carryover on line 1 of 83K but, I can't imagine how that would have any effect on Gross Receipts or COG's

As far as the Sch L, there are only a couple numbers (lines 1, 10b) on the asset side and only my credit line and some payroll tax liabilities (lines 17 and 18) and some carryover numbers (lines 23, 24 and 25).

This is driving me nuts and I'm running out of time. The thought of finding a qualified person this time of year to help me out is slim. LOL

I did my own books for 12 out of 20 years for my business and was never $.01 out of balance. The past 8 years, using professionals and CPA's, I've had nothing but trouble.

Well, thank you very much for your reply, Terry. You sound like a sharp guy. I wish you were local and could stop by.

Thanks again.

[royg]

Is it possible that depreciation might be responsible for some of the difference? How about inventory losses? And are you prepaying taxes, or making estimated payments for VAT?

Wish I could be of more specific help.

[Terry]

Thanks for the kind words. It sounds to me like poor communication with whomever you've been using.

A quick piece of unsolicited advice. I assume you've already extended your corporate return. I would estimate what you expect your K-1 income to be and file a personal extension, paying what you think you owe with it.

TIP: Add your first quarter estimate to the amount paid with the extension instead of sending a 1Q coupon. When you file, apply any overpayment to your estimates. This should keep you out of a failure to pay penalty if you miscalculate what you owe.

After April 15, take your time to find a good accountant. I would recommend a CPA firm with at least 2 or 3 CPA's on staff. (for a variety of reasons) Make sure they understand QuickBooks and will prepare your return from an accountant's copy. Compare the return with your file after importing their changes before you file and ask them to explain any adjustments.

Also, authorize your new accountant to call your old one. Usually a quick phone call between them can save a lot of time. (and money)

Good Luck!!

[Milsup]

Thanks again, Terry. Poor communication is indeed a prob. I had an accountant do the 1120s for this year and now, he won't return calls to answer questions.

So, I filed an extension of the 1120s and I'm trying to answer the questions I have before I file the final.

I would like to get this straight before 4/15 so, I do not need to file an extension on my pers (and the other shareholder). It's only 2 hours of work and I have 2 weeks.

I don't pay estimated so, that's not a prob.

Finding a CPA that knows QuickBooks has always been a problem for me. They all seem to Poo Poo it as "Not a real accounting package".

I'll get it done before 4/15....I assure you. LOL

Roy. Total depreciation for the year is only 4K (shown on sch L, line 10b) and I don't have inventory (all drop ship).

Terry....you ever consider doing taxes via email and phone? You have a paypal account?

My QB file is 100 meg...you on dial-up? LOL

[Milsup]

Hey guys. Does the amount of cash in my checking account affect the accrual to cash conversion for "Total Receipts" (1120s line 1c)?

[Terry]

I'm not sure I understand the question. Can you elaborate a little?

[Milsup]

Under current assets for 12/31/01 and 12/31/02 I have....

Total Checking/Savings 12/31/01..$60081.11
Total Checking/Savings 12/31/02..$2522.56

Just wondering if the difference somehow figures into the acrual to cash conversion.

And, BTW. I am a mod on a number of computer forums and I know what it's like to service the people like me who come to visit with problems. It's a lot of work and I know it. I just wanted you to know I appreciate the time. Thank you.

[Terry]

Not directly. To many things affect cash...Receipts, Expenses, Inventory, Loans, Distributions, etc...

A/R, A/P, Inventory, Prepaids, and Accruals are the usual Cash to Accrual adjustments.

What part of country are you in?

[Milsup]

I'm in Ohio.

I understand that those things affect the expenses and balance sheet but, they should not affect the Gross Receipts.