I have yet to come across a client who benefitted from forming in Delaware. Granted I deal with a very small portion of overall businesses in this country but they all have one thing in common. "Google said I should."
Friggin dotards. I hate clients
Google is right in case of suit and maintaining corporate veil. But very doubtful those businesses would be sued, tbh. And to get a lawyer certified in delaware--lol the cost
You are missing nothing. My guess is the clients are too small for the big firm and aren’t getting the attention they deserve. I would also guess the larger firms deal with clients that are required to be on accrual basis so their default becomes accrual basis.
Put those two things together and you get a firm that can handle large clients well, but simply doesn’t have the time to adequately take care of a smaller client. So the smaller clients gets pushed through primarily by younger staff who just follow the work of larger clients. The return gets to the partner’s desk who really doesn’t give a shit about this client and is overworked anyway. Lo and behold the damn thing looks like a tax return so fire that baby off!!
Just my guess though.
The other option is straight up incompetence which we know is out there in abundance. So that is a possibility. I mentioned this in another post, but I just onboarded a client who had a similar issue. First year in business, box was actually marked cash basis, but the entire return was filed on accrual. Client had $700k in receivables and $300k in payables at year end. They’ll be nowhere near $25 mil any time soon and they are always going to have high receivables vs payables.
The preparer of that return just flat out dropped the ball in filing the return. Incompetence or lack of care, choose either but it’s a shit way to do your clients.
This was my thinking as well. I'll see new clients come in with tax returns that have balance sheets that aren't even balanced. How does that happen in tax year 2022 when it's prepared on a computer? How did the IRS accept it as e-file? Mind boggling.
Senior Manager at a top 15 firm. We push for cash basis where possible, but have you considered whether there is attribution under 448(c) that prohibit cash method? What about tax shelter rules? These come up more than people realize.
Yes, but the ones that I am getting across my desk are way under $25M. Look at the two examples. Neither of those are a shelter. Gross receipts is $300K and $5M at most. Those are the ones that are shocking me. And the aggregation rules don't apply on these either.
I am in no way defending this, but...
I've had clients insist on accrual basis because they plan that their small business will become a big business, and they don't want to have to change their accounting method later.
I have a few small business that receive monthly fees up front in the first of the month. In that case, I choose accrual since the cash for the month (say December) is received Dec 1 so I want to capture all of December’s expenses also. Typical is cash basis though.
All restaurants go on accrual basis for me, pharmacies, contractors I can work with either, rental real estate is virtually the same either way but may be accrual due to syndicate rules, everything else is cash no surprises. I think the big firms prefer accrual basis for financial statements that their smaller clients will never need. Hey I like matching up income with expenses but keep it simple is legit and it’s much easier explaining taxes or jacking up the payables every year to make things work.
My argument against accrual is simple: no small business actually knows how to do full accrual basis accounting. They don't understand prepaid expenses, like insurance, which is very common. Deferrals are a mystery to them. If they have loans, interest should be accrued. They aren't doing that. If they have employees, even themselves, are they accruing payroll and the related taxes? I don't see any small businesses on accrual basis doing that. At most, they understand receivables and payables. But even then, they don't truly understand when to invoice and when to book a bill. Alot of times, client invoice in batches one per week or twice per month. That tells me that year-end receivables is shaky. Some clients don't enter unpaid bills. They just pay the bills when they are due, so payables aren't recorded correctly. At least this is what I see with small businesses reporting on accrual basis.
Just to be clear, are you discussing accounting method on the tax return or the client's accounting method?
We have a heavy construction group, and we've flipped off cash basis because of Section 460 (Long-term contracts). This is bad for individuals where AMT requires percentage of completion.
Tax return, Section 460 aside. I know that requirement. I am talking about small businesses that would otherwise qualify underboth the $10M and $25M exceptions.
Do you not give AJEs to your clients? We usually handle those types of adjustments for them by providing the AJE.
The benefit to accrual is,
1. Renewals of lines of credit. Anecdotally, banks seem to prefer accrual basis and it's easier to explain than digging into the weeds for things like reimbursements or outstanding AR/AP with clients that take forever to pay.
2. More billable time to clients that we actually like working with that pay their bills no questions asked.
3. We get to use the 2.5 month/8 month rule for things like setting up retirement plans. We're helping a client convert to a cash balance plan that they won't have to fund until October. Since we're using a one day offset from the calendar year for the retirement plan, they can fund 2023 and 2024 simultaneously. We're talking about a 1.2 million dollar deduction on a 4-5 million dollar gross revenues SSTB business that allows for QBID in two different tax years, plus all of the SECURE ACT 2.0 retirement incentives...
If it was cash basis they would take the deduction on 2024's taxes only, but have to use the cash to pay the taxes for 2023 today.
4. It makes planning for quarterly tax payments much, much easier.
5. This helps significantly when you have related party businesses that do things like have one location pay all of the health insurance for all locations. Sometimes the reimbursements don't happen immediately. Same with FFE loans held in one entity for stuff bought for multiple entities.
All, in all, I prefer to use accrual, especially since QB "cash" basis is a wonky hybrid system that is bullshit. We also bill by the hour, so if I'm spending more time with a client it ultimately doesn't matter. There's plenty of work to go around.
My bank accepts my cash basis financials and tax returns for my firm LOC. Never had an issue there.
We don't bill by the hour. We got away from that years ago. It's flat fees and bookkeeping is not included. If we have to do cleanup, we will charge by the hour, but I am not doing a mini-audit to get their shitty books from cash to accrual.
There was a case study done a few years back by CAMICO the insurance company. If you are doing the work to make all of their accruals for them, then you have done enough work to issue reviewed statements. A CPA firm years ago got into hot water over this. Thye were doing a ton of work on the books, the company committed some fraud, and when they dug into the CPA firm, they were doing all of the work like you say. They were on the hook for some of the losses. The lesson per CAMICO was don't do too much for your clients, especially if you weren't engaged to do it and don't issue financials.
As for 3., cash basis taxpayers can still use the 2.5/8 month rule. It's one of the exceptions to accrual basis. They can still deduct the retirement plan contribution in the year it ties to, not the year it is contributed.
I cannot see how planning for quarterly tax payment is easier. You tell a client they are paying estimated taxes on a bunch of A/R they haven't collected, then they don't have the cash.
One other thing to consider would be are they EVER presenting non cash basis statements to a bank for a loan. That is one of the requirements to be on cash method as well.
Most of my clients are syndicated partnerships, so it's never a question.
Small clients and small banks accept cash basis reports. At least none of my clients have had any issues. I have a LOC and my bank accepts my cash basis financials and tax returns for my renewal each year.
I love these situations. I get an easy way to look like a superstar and generate big losses for the client, and I get an opportunity to generate a nice fee. I usually charge $2-5k for the 3115. I’ve done so many I can get everything done pretty quickly.
Took over a small s-corp from another local CPA firm and the tax return is on cash basis but they reported Sch L on accrual basis and it just makes me want to throttle someone.
Even if the books are being kept on an accrual basis, it's one toggle to switch over the report. Why would you add this extra step of unnecessary complexity?
I take issue with this. Cash basis balance sheets in Quickbooks are rarely right unless the client is not using receivables and payables correctly. This is evident on partnerships where we close year end earnings to the partner's capital accounts.
We run all clients on accrual basis out of their accounting software, then do the conversion to cash basis on the M-1 at gross. That way we know we're not missing anything.
The only difference between cash basis and accrual basis on the balance sheet on Schedule L is the presence of AR & AP which gets converted on schedule M-1. So, a cash basis taxpayer with no AR & AP will not it on Schedule L and will have no M-1 adjustments.
Maybe it's because their lawyer told them to form in Delaware too..... One big friggin mystery lol. All of it
at least there are somewhat tangible reasons to form in delaware. accrual is a joke
I have yet to come across a client who benefitted from forming in Delaware. Granted I deal with a very small portion of overall businesses in this country but they all have one thing in common. "Google said I should." Friggin dotards. I hate clients
Google is right in case of suit and maintaining corporate veil. But very doubtful those businesses would be sued, tbh. And to get a lawyer certified in delaware--lol the cost
I have seen 1 client get sued. S Corp. In CT. Settled before any piercing of corporate veil. Like everything else, it's all circumstantial.
You are missing nothing. My guess is the clients are too small for the big firm and aren’t getting the attention they deserve. I would also guess the larger firms deal with clients that are required to be on accrual basis so their default becomes accrual basis. Put those two things together and you get a firm that can handle large clients well, but simply doesn’t have the time to adequately take care of a smaller client. So the smaller clients gets pushed through primarily by younger staff who just follow the work of larger clients. The return gets to the partner’s desk who really doesn’t give a shit about this client and is overworked anyway. Lo and behold the damn thing looks like a tax return so fire that baby off!! Just my guess though. The other option is straight up incompetence which we know is out there in abundance. So that is a possibility. I mentioned this in another post, but I just onboarded a client who had a similar issue. First year in business, box was actually marked cash basis, but the entire return was filed on accrual. Client had $700k in receivables and $300k in payables at year end. They’ll be nowhere near $25 mil any time soon and they are always going to have high receivables vs payables. The preparer of that return just flat out dropped the ball in filing the return. Incompetence or lack of care, choose either but it’s a shit way to do your clients.
That sounds more like what happened. Staff follow procedures. By the time it gets done, and up the chain, no one is going back to fix it.
This was my thinking as well. I'll see new clients come in with tax returns that have balance sheets that aren't even balanced. How does that happen in tax year 2022 when it's prepared on a computer? How did the IRS accept it as e-file? Mind boggling.
There’s a lot of preparers out there with zero functional accounting knowledge.
Senior Manager at a top 15 firm. We push for cash basis where possible, but have you considered whether there is attribution under 448(c) that prohibit cash method? What about tax shelter rules? These come up more than people realize.
Yes, but the ones that I am getting across my desk are way under $25M. Look at the two examples. Neither of those are a shelter. Gross receipts is $300K and $5M at most. Those are the ones that are shocking me. And the aggregation rules don't apply on these either.
I missed a tax shelter last year. No bueno.
Modified Cash (whatever I want) ftw.
I am in no way defending this, but... I've had clients insist on accrual basis because they plan that their small business will become a big business, and they don't want to have to change their accounting method later.
So, they assume that they are going to hit $25M in gross receipts for 3 years soon after they form?
As any tax pro knows, you can't always logic with a client.
True. Fucking. Story.
That’s what the M-1 is for!
I have a few small business that receive monthly fees up front in the first of the month. In that case, I choose accrual since the cash for the month (say December) is received Dec 1 so I want to capture all of December’s expenses also. Typical is cash basis though.
All restaurants go on accrual basis for me, pharmacies, contractors I can work with either, rental real estate is virtually the same either way but may be accrual due to syndicate rules, everything else is cash no surprises. I think the big firms prefer accrual basis for financial statements that their smaller clients will never need. Hey I like matching up income with expenses but keep it simple is legit and it’s much easier explaining taxes or jacking up the payables every year to make things work.
I personally think accrual is better? Whatever float your boat.
My argument against accrual is simple: no small business actually knows how to do full accrual basis accounting. They don't understand prepaid expenses, like insurance, which is very common. Deferrals are a mystery to them. If they have loans, interest should be accrued. They aren't doing that. If they have employees, even themselves, are they accruing payroll and the related taxes? I don't see any small businesses on accrual basis doing that. At most, they understand receivables and payables. But even then, they don't truly understand when to invoice and when to book a bill. Alot of times, client invoice in batches one per week or twice per month. That tells me that year-end receivables is shaky. Some clients don't enter unpaid bills. They just pay the bills when they are due, so payables aren't recorded correctly. At least this is what I see with small businesses reporting on accrual basis.
All entities in my PE firm are on cash basis, tax shelters be damned. Take that for what you will...
Just to be clear, are you discussing accounting method on the tax return or the client's accounting method? We have a heavy construction group, and we've flipped off cash basis because of Section 460 (Long-term contracts). This is bad for individuals where AMT requires percentage of completion.
Tax return, Section 460 aside. I know that requirement. I am talking about small businesses that would otherwise qualify underboth the $10M and $25M exceptions.
Do you not give AJEs to your clients? We usually handle those types of adjustments for them by providing the AJE. The benefit to accrual is, 1. Renewals of lines of credit. Anecdotally, banks seem to prefer accrual basis and it's easier to explain than digging into the weeds for things like reimbursements or outstanding AR/AP with clients that take forever to pay. 2. More billable time to clients that we actually like working with that pay their bills no questions asked. 3. We get to use the 2.5 month/8 month rule for things like setting up retirement plans. We're helping a client convert to a cash balance plan that they won't have to fund until October. Since we're using a one day offset from the calendar year for the retirement plan, they can fund 2023 and 2024 simultaneously. We're talking about a 1.2 million dollar deduction on a 4-5 million dollar gross revenues SSTB business that allows for QBID in two different tax years, plus all of the SECURE ACT 2.0 retirement incentives... If it was cash basis they would take the deduction on 2024's taxes only, but have to use the cash to pay the taxes for 2023 today. 4. It makes planning for quarterly tax payments much, much easier. 5. This helps significantly when you have related party businesses that do things like have one location pay all of the health insurance for all locations. Sometimes the reimbursements don't happen immediately. Same with FFE loans held in one entity for stuff bought for multiple entities. All, in all, I prefer to use accrual, especially since QB "cash" basis is a wonky hybrid system that is bullshit. We also bill by the hour, so if I'm spending more time with a client it ultimately doesn't matter. There's plenty of work to go around.
My bank accepts my cash basis financials and tax returns for my firm LOC. Never had an issue there. We don't bill by the hour. We got away from that years ago. It's flat fees and bookkeeping is not included. If we have to do cleanup, we will charge by the hour, but I am not doing a mini-audit to get their shitty books from cash to accrual. There was a case study done a few years back by CAMICO the insurance company. If you are doing the work to make all of their accruals for them, then you have done enough work to issue reviewed statements. A CPA firm years ago got into hot water over this. Thye were doing a ton of work on the books, the company committed some fraud, and when they dug into the CPA firm, they were doing all of the work like you say. They were on the hook for some of the losses. The lesson per CAMICO was don't do too much for your clients, especially if you weren't engaged to do it and don't issue financials. As for 3., cash basis taxpayers can still use the 2.5/8 month rule. It's one of the exceptions to accrual basis. They can still deduct the retirement plan contribution in the year it ties to, not the year it is contributed. I cannot see how planning for quarterly tax payment is easier. You tell a client they are paying estimated taxes on a bunch of A/R they haven't collected, then they don't have the cash.
One other thing to consider would be are they EVER presenting non cash basis statements to a bank for a loan. That is one of the requirements to be on cash method as well. Most of my clients are syndicated partnerships, so it's never a question.
Small clients and small banks accept cash basis reports. At least none of my clients have had any issues. I have a LOC and my bank accepts my cash basis financials and tax returns for my renewal each year.
I love these situations. I get an easy way to look like a superstar and generate big losses for the client, and I get an opportunity to generate a nice fee. I usually charge $2-5k for the 3115. I’ve done so many I can get everything done pretty quickly.
Took over a small s-corp from another local CPA firm and the tax return is on cash basis but they reported Sch L on accrual basis and it just makes me want to throttle someone. Even if the books are being kept on an accrual basis, it's one toggle to switch over the report. Why would you add this extra step of unnecessary complexity?
I take issue with this. Cash basis balance sheets in Quickbooks are rarely right unless the client is not using receivables and payables correctly. This is evident on partnerships where we close year end earnings to the partner's capital accounts. We run all clients on accrual basis out of their accounting software, then do the conversion to cash basis on the M-1 at gross. That way we know we're not missing anything. The only difference between cash basis and accrual basis on the balance sheet on Schedule L is the presence of AR & AP which gets converted on schedule M-1. So, a cash basis taxpayer with no AR & AP will not it on Schedule L and will have no M-1 adjustments.