@034 CHAP 8

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         ³         ACCRUAL BASIS TAX ACCOUNTING        ³
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Most large corporations (except S corporations and certain
"qualified personal service corporations") and any busi-
nesses with significant inventories are generally required
to report income and expenses on the ACCRUAL BASIS for tax
accounting purposes.  The accrual method requires you to
report income when it is earned, rather than when it is
received, in general.  Expenses can be deducted when all
events have occurred that fix the amount (and the fact)
of your business's liability for a particular expense item,
even though it may be paid in an earlier year or a sub-
sequent year.  However, if "economic performance" required
of the other party does not occur until a subsequent tax
year, you may not be able to deduct an accrued expense un-
til such economic performance occurs, although there are
some exceptions to this rule, such as for recurring
expenses.

Using the accrual method will often be less advantageous
than the cash method for tax purposes.  However, if yours
is a business in which most of your customers pay promptly
in cash, so that you have almost no accounts receivable,
but have significant accounts payable for various expenses,
the accrual method may actually be beneficial tax-wise, by
allowing you to accelerate the deduction of such payables.
This will result in a net tax deferral where the amount of
such payables is usually larger than your receivables at
year-end.

See the discussion of CASH BASIS accounting in this program
(use the "INDX" command) or in the STARTING & OPERATING A
BUSINESS book for your state for '86 Act tax law provisions
that now REQUIRE many more taxpayers (certain C corpora-
tions) to use the accrual method, rather than the cash
method of accounting.