Tax Accounting Corner

Certain common transactions may impact a partnership's or S corporation's method(s) of accounting. For example, a contribution to a partnership under Code Sec 721 or a technical termination of a partnership under Code Sec 708(b)(1)(B) are typical transactions in which method of accounting issues arise. Generally, in a contribution qualifying under Code Sec 721(a), the partnership may adopt new accounting methods to be applied prospectively. This rule applies to new partnerships and partnerships that have not adopted a method of accounting for a specific item. However, if the contribution is made to an existing partnership that has already established a method of accounting for a particular item, the partnership will typically continue with its established methods of accounting. Similar to the creation of a new partnership, a newly created S corporation may choose which accounting methods to adopt.