@037 CHAP ZZ

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         ³          CASH BASIS TAX ACCOUNTING          ³
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The cash basis of accounting (or cash receipts and disburse-
ments method) is the simplest method generally in use.  Un-
der the cash method, for the most part, you only report
income when it is received (not when it "accrues") and de-
ductions generally are not allowed until an expense is paid
(except for expenditures that must be depreciated or amor-
tized over a period of years, whether or not you have fin-
ished paying for them.  Thus, a business usually does not
have to report its accounts receivable at year-end in in-
come and cannot deduct its year-end accounts payable, if on
the cash method.  Obviously, if your year-end receivables
are usually larger than your payables, it can give you a
significant tax deferral if you are able to use the cash
method rather than the accrual method for tax purposes.
Particularly since you can make a point of paying off as
much of your deductible accounts payable as possible just
before the tax year ends!

The cash method is not allowed for taxpayers with regard to
inventories where the purchase or sale of goods is a "mater-
ial income-producing factor" in the business.  Thus, it is
usually used by individuals and companies engaged in finan-
cial and service businesses, such as consulting, profession-
al services, real estate sales, etc.

@IF143xx]Because your business is one in which the purchase or the
@IF143xx]sale of goods is a material income-producing factor, the
@IF143xx]cash method of accounting, at least in its "pure" form, is
@IF143xx]not available to @NAME.
@IF143xx]
@IF143xx](Some firms that have inventories may be allowed to adopt
@IF143xx]a "hybrid" form of accounting, where they report purchases
@IF143xx]and sales of inventory-related items on an accrual basis,
@IF143xx]while reporting service revenues or other income and expen-
@IF143xx]ses on a cash basis.)
@IF143xx]
@IF144xx]NOTE:  @NAME has no inventories.
@IF144xx]
The Tax Reform Act of 1986 has also disallowed use of the
cash method of tax accounting for "C" corporations (corpor-
ations other than "S" corporations) and for partnerships
that have partners that are C corporations.  However, small
C corporations (under $5 million sales) may continue to use
the cash method, if it is otherwise allowable, and even
large C corporations that are employee-owned personal ser-
vice firms (such as law, medical, accounting, architectural
and consulting corporations) are also exempted from this
new limitation.  Note that only C corporations, not S cor-
porations or unincorporated businesses, are affected by the
new limitations on use of the cash method.

Your company, @NAME, is a @ENTITY.

@IF117xx]The average annual gross sales for the three preceding tax
@IF117xx]years for @NAME is:  @GROSS
@IF117xx]
@IF117xx]Because it is a "C corporation," you need to be mindful of
@IF117xx]the above restrictions on use of the cash method of account-
@IF117xx]ing, as discussed above.
@IF117xx]