Question

Under what condition may a partnership use the cash method despite having a corporate partner?

a) If the partnership has substantial capital investment.

b) If the partnership has an LLC structure.

c) If the partnership's average gross receipts for the prior three taxable years exceed a specified limit.

d) If the corporate partner has a controlling interest in the partnership.

Answer 1

A partnership may use the cash method of accounting despite having a corporate partner if the corporate partner has a controlling interest in the partnership.

Step-by-step explanation:

In general, partnerships are required to use the accrual method of accounting for tax purposes. However, there is an exception that allows a partnership to use the cash method when it has a corporate partner. This exception applies if the corporate partner has a controlling interest in the partnership.

A controlling interest means that the corporate partner owns more than 50% of the partnership's capital and profits. When a partnership has a controlling corporate partner, it can use the cash method of accounting for tax purposes, which means it recognizes income and expenses when they are received or paid in cash.

This exception is intended to simplify the tax reporting for partnerships with a controlling corporate partner, as the cash method can be easier to administer compared to the accrual method. However, it's important to note that this exception only applies to partnerships with a controlling corporate partner and does not apply to partnerships with individual partners.