Tom and Jerry are considering forming a partnership. Both taxpayers use the calendar year and are cash basis taxpayers. The partnership will not be a tax shelter. The partners are uncertain as to whether the partnership should use the cash or accrual method of accounting. Also, the idea of a tax deferral in the first year of operations has led them to consider using a June 30 fiscal year-end for the partnership.
As their tax adviser, identify the issues that must be considered in selecting an accounting method and tax year for the partnership.
Because this is a partnership and not a tax shelter, it doesn't matter if they use cash or accrual basis accounting for tax reporting purposes. The only disadvantage to using accrual basis accounting is that revenue will have to be recognized before it is actually received, which means that the partners will ...
This solution identifies issues that must be considered in selecting an accounting method and tax year for Tom and Jerry's partnership.