Rule: While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis method of accounting for tax purposes is required for the following:

1. The accounting for purchases and sales of inventory,

2. Tax shelters,

3. Certain farming corporations, and

4. 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 average annual gross receipts for the three-year period ending with the tax year.

Choice "d" is correct. The facts tell us that the shareholders would like to change the status to a C corporation using the same year end as the S corporation (June 30). Per the above rule, C corporations with greater than $5 million average annual gross receipts must use the accrual basis of accounting for tax purposes. When this corporation changes to a C corporation status, therefore, it must report on the accrual basis of accounting for tax purposes. It will be able to stay on the June 30 year end, as the shareholders desire.

Choice "b" is incorrect. The year will be June 30 (not December 31) with the accrual (not cash) basis of accounting.

Choice "c" is incorrect. The year will be June 30 (not December 31), but the accrual basis of accounting will be used.

Choice "a" is incorrect. The year will be June 30, but the accrual (not cash) basis of accounting will be used.