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As tax season approaches, nursing facilities should remember that the cash method of accounting for income tax reporting may be a better option than the accrual method. The cost method allows facilities to defer taxable income and have more deductions for accrued expenses.

Tax strategies

Cash Method of Accounting Beneficial for Many Nursing Facilities

  • Casey Badger
  • 3/5/2012

As the tax return filing deadline approaches, nursing facilities should remember that the cash method of accounting for income tax reporting may be a better option than the accrual method, as it may allow facilities to defer taxable income.

“The cash method of accounting is automatically available to smaller nursing facilities, but in the past few years, the IRS has started permitting larger nursing facilities to use this method. However, we still regularly encounter new clients that are large nursing facilities and are unaware that this method is available to them,” says Casey Badger, a health care manager with CliftonLarsonAllen.

Benefits of the cash method

Nursing facilities generally receive payments at least one month after a service is provided. Accounts payable and other accrued expenses for nursing facilities typically do not lag as long as revenues.

Not all accrued expenses are deductible for income tax purposes. However, if accounts receivable exceed accounts payable and accrued expenses, nursing facilities may be able to defer taxable income by utilizing the cash method.

Those that switch to the cash method typically have a large decrease to their taxable income for the first year. They also benefit from being on the cash method in subsequent years by having a net deferral of accounts receivable over accrued expenses. A nursing facility will eventually have the same amount of taxable income if it uses the cash or accrual method, but may have a lower taxable income for many years with the cash method.

Available to certain facilities

The following nursing facility entity structures are not allowed to convert to the cash method:

  • C corporations with over $5 million in revenue
  • Partnerships that have certain C corporations as partners

How to change

To change to the cash method, a nursing facility must file Form 3115 with the IRS.

Switching to the cash method may require permission from the IRS, depending on the organization’s revenue. Nursing facilities and related entities that have revenue of less than $10 million automatically qualify for a change to the cash method. Automatic changes require no filing fee for Form 3115, and the form can be filed by the due date of the tax return, including extensions. For example, if a nursing facility that operates on a calendar year wants to utilize the cash method for 2011 and has extended its tax return filing date to September 15, 2012, it has until that date to file Form 3115.

Advanced consent process

Nursing facilities and related entities with revenue of more than $10 million must go through the advanced consent process before the IRS will grant permission to switch to the cash method. In recent years, the IRS has been consistently granting requests to change methods.

The advanced consent process requires the nursing facility to pay a user fee of $7,000 (as of 2012) to the IRS, and file Form 3115 before the end of the tax year in which the change will take effect. For example, a nursing facility that operates on a calendar year and wants to start using the cash method in 2012 will be required to file Form 3115 by December 31, 2012.

A nursing facility changing its method of accounting under the advanced consent process must wait for approval from the IRS before it is allowed to file its first tax return under their new method. The approval process can take anywhere from two to nine months. Therefore, many facilities that are waiting for approval must also request a filing extension.

How we can help

Many nursing facilities may benefit of using the cash method of accounting for income tax reporting purposes. Your tax advisor can help determine if the cash method is right for you, and assist in the transition.