Accrual Basis Is King When Selling Your Business

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Thinking of selling your business – Cash basis reporting is generally a less desirable tax reporting methodology in the context of M&A transaction planning. Currently, there are many potential traps and uncertainties in the tax code that prevent symmetry tax treatment; creating in many instances, a tax whipsaw effect with respect to cash basis taxpayers involved in a sales transaction.

The good news is with proper tax planning, there are numerous opportunities and applicable strategies to avoid asymmetrical tax results. For example, a taxpayer contemplating a change of control transaction as discussed above, should consider changing its cash basis tax method to the accrual basis in the year preceding the year of the contemplated sales transaction. This simple strategy affords business owners the ability to make an educated decision and depending on the underlying facts and circumstances (i.e., whether the return for the preceding year is extended, etc.), the switch does not need to occur until the transaction is completed.

Taxpayers should be aware that there are some tax professionals currently asserting that you can achieve comparable symmetry with cash basis reporting applying certain court case precedents and the application of constructive payment doctrine. However, if you peel the onion back, the applications of such tax strategy has a lot of technical challenges and inherit limitations with no technical authority support in certain situations, thus putting you at risk upon examination.

If you are a cash basis taxpayer planning for a sales transaction, please schedule a free consultation with Jorge Rodriguez, CPA. Jorge is a Tax Director and part of Aronson’s Financial Advisory Services Group. Jorge can be reached by email at jrodriguez@aronsonllc.com or (301) 222-8220.

About Jorge Rodriguez

Jorge Rodriguez has written 26 post in this blog.

Jorge L. Rodriguez, CPA, serves as a partner in Aronson's Tax Services Group. He is a seasoned professional with more than 25 years of public accounting experience. He is known for delivering a broad, in-depth tax perspective, informed by his deep, wide-ranging industry knowledge, to every engagement for the benefit of his diverse clientele. Jorge specializes in federal tax consulting and compliance with a special focus on M&A transaction structuring, planning, and modeling. He routinely helps his clients resolve highly complex tax matters including: entity formation, classification, and conversion planning issues; accounting method and period elections and changes; consolidated tax return filling elections and tax accounting concerns; Sec 382 analysis and study; and all aspects of ASC 740 compliance involving purchase accounting and foreign operation reporting areas. Jorge works with a broad cross section of companies. His clients include emerging businesses, middle-market firms, and public business enterprises engaged in a wide variety of industries including government contracting, software development, light manufacturing, IT technology services and products sales, and specialty construction contracting. Jorge is passionate about helping his clients formulate tax strategies that make business sense. He shares his expert insights freely as a regular contributor to Aronson’s Tax Matters blog with series such as “M&A Shop Talk.” Prior to joining Aronson in 2009, Jorge was a practicing tax partner with several regional public accounting firms. He is licensed to practice in Maryland and Virginia. Professional & Community Involvement: Maryland Association of Certified Public Accountants: Member American Institute of Certified Public Accountants: Member Education: University of Maryland: Bachelor of Science in Accounting -Ongoing education in tax matters

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