Choice "a" is correct. While the cash basis of accounting is used for tax purposes by most individuals, qualified personal service corporations (which are treated as individuals for purposes of these rules), and taxpayers whose average annual gross receipts do not exceed $1,000,000, the accrual basis method of accounting for tax purposes is required for the following:

• The accounting purchase and sales of inventory (and inventories must be maintained)

• Tax shelters

• Certain farming corporations (other farming or tree-raising businesses may generally use the cash basis)

• C Corporations, trusts with unrelated trade or business income, and partnerships having a C corporation as a partner PROVIDED the business has GREATER than $5 million of average annual gross receipts for the three-year period ending with the prior tax year

Choice "c" is incorrect. A C corporation with average annual sales for the past three years of less than $1,000,000 would not be required to file income taxes using the accrual basis method of accounting, as generally, taxpayers whose annual average annual gross receipts do not exceed $1,000,000 are exempt from the requirement.

Choice "b" is incorrect. A service company with more than $1,000,000 in annual sales will generally not be required to file income taxes using the accrual basis of accounting because it likely has not met the test of $5 million in average annual gross receipts for the three-year period ending with the prior tax year. The facts do not disclose all relevant information; however, remember, the BEST answer is what we are looking for (and that is choice option "a").

Choice "d" is incorrect. Personal service corporations are treated as individuals for purposes of the rules for accrual basis tax reporting; therefore, personal service corporations (regardless of the amount of gross receipts), may use the cash basis of reporting for income tax purposes.