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Tax Impact of ASC 606 adjustment to retained earnings

Level 2

An S-corporation signs contracts with franchisees and earns franchise fee income. In the past years, the S-corporation recognizes revenue once the money is received, however, in 2019, the client adopted a new revenue standard (ASC 606) that it recognizes revenue once it is earned but not received. The accountant of the S-corporation uses a modified retrospective method that results in an adjustment recognized to the opening balance of retained earnings as of the first day of 2019. Does anyone know the tax impact of this issue? I mean, how do I deal with the reduction of beginning retained earnings because of adoption of ASC 606, and 2019, for the tax basis, do we only recognize revenue when we earned it, or all money of franchise income we receive, we recognize it as the income of the S-corporation? (the S-corporation use accrual basis now)

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2 Replies 2
Level 9
Level 9

I believe that a change of accounting for financial statement purposes has no impact on your accounting method for income tax purposes. 

Assuming Schedule L is book basis, you just have Schedule M adjustments. I usually run a restatement to prior year through the current year Schedule M as a Prior Period Adjustment, but that's because I like the beginning for one year to match the ending of the previous year.

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Level 15

Why ask again? You can always add addl info to your original post.


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