Cash or Accrual based accounting
Businesses have discretion when selecting the basis for their accounting methods; cash or accrual. There are material differences and depending on your specific situation those differences are worth considering. The inherent differences lie in the timing of when revenues and expenses are recognized.
Traditionally utilized by small businesses, the cash basis accounts for revenue only when the corresponding money is received, and costs/expenses only when the money is actually paid.
The accrual method differs from the cash basis, and accounts for revenues when they are realized or realizable and earned (usually when goods are transferred or services rendered), regardless of when cash is physically received. Accrual accounting is the most common method used by businesses and conforms to the generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
If it is less common and doesn’t conform to GAAP, then why do some businesses choose cash basis?
One of the main reasons small business use cash basis accounting is that it is easily understood and simple to implement and maintain. Additionally, businesses can influence their tax liability by timing the payment of costs and expenses and/or receipts by accelerating or delaying invoicing. If year-end cash flow is a concern, your business can make expense payment via credit card and still take advantage of accelerated deductions.
We can work with you to determine potential current and future years tax rates, potential alternative minimum tax (AMT) liabilities, and help plan adjustments to reduce your cumulative tax burden.
Depreciation methods & Section 179 deductions
If your business is considering new equipment or asset purchases depreciation allowances should always be considered. Businesses have discretion in choosing not only which depreciation method to employ but whether or not they wish to take bonus depreciation or section 179 deduction. Section 179 deductions are often utilized by small and medium-sized businesses and the IRS tax code allows for the full write-off of the total purchase price for qualifying equipment and/or software purchased or financed during the tax year. The 179 deduction limit for 2018 is currently set at 1 million dollars and is good on new and used equipment and commercial off-the-shelf (COTS) software put into service during the calendar year. To qualify for election the business has a spending cap of 2.5 million dollars on equipment/software or the deduction is reduced (dollar for dollar) for purchases in excess of that amount made in the calendar year. For business spending in excess of the cap limit bonus depreciation is often more readily used as they are not inhibited by the dollar for dollar reduction required under 179 deductions and is available for new and used items.
Business or Personal expenses
Are your expenses personal or business related? If the expense can reasonably and readily be traced to your business or if the expense is both ordinary and necessary in pursuit of your business activities they may qualify as business expenses. This can be an important distinction for S Corporations, partnership, or sole proprietorships as operating expenses will qualify as “above-the-line” deductions, rather than itemized deductions, thus lowering your adjusted-gross-income (AGI) which can place you in a lower tax bracket and/or may increase the potential deductibility of itemized deductions.