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Comparison of cash and accrual methods of accounting Archives - R. Darren Sanford, CPA, CGMA
Jul 232014
 
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5 Basic Tax Tips for New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure. Prior to start up, you’ll need to choose the structure of your business. Some common types include sole proprietorship (Form 1040), partnership (Form 1065) and corporation (Form 1120). You may also choose to be an S corporation (Form 1120-S) or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type. A Limited Liability Company (created by state statute) may be taxed as a sole proprietorship (single member), a partnership (multiple members), or other taxable entity.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number. You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method. An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

For assistance with starting a business, feel free to contact me via the form below.

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Credit: irs.gov

 

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Feb 162014
 
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Choosing an Accounting Method

There are a number of ways to structure your business in terms of its legal form, but there are only two accounting methods generally used for recognizing income and related expenses for each accounting period.  Once you choose your accounting method, you must follow it consistently.  Generally, you may not change your method of accounting unless you obtain permission from the IRS.  The two most commonly used accounting methods are the cash method and the accrual method.

Due to its simplicity, the cash method is a popular choice for small businesses.  To determine gross income, include all cash, checks and  the fair market value of property and services you received during the year.  If you receive a check on December 30, but decide not to cash or deposit it until the following year, you must still include that as income in the year you received the check.

Businesses expenses are usually deducted in the year actually paid.  For example, you order office supplies in October of the current year and they arrive in December.  You send a check to pay for them in January of the following year.  Under the cash method, you would claim that business expense (office supplies) on your current year tax return because that is the year you paid for the supplies.  Certain businesses cannot use the cash method of accounting for tax purposes.  In addition, special rules apply for the accounting of inventory.

Under the accrual method of accounting, income is reported in the year in which all events that fix the right to receive it have occurred, and the amount can be determined with reasonable accuracy, even if income was received in a different year.  For example, the accrual method requires that income be reported when the service is performed.  It does not matter that the customer doesn’t pay you until the following year.  Similarly, you deduct business expenses in the year the liability arises, regardless of when they are actually paid.

Using the office supply example, under the accrual method, you would deduct the business expenses for supplies on  the tax return of the year you ordered and received the supplies, not the year when you actually paid the invoice.

To request a change in accounting method, taxpayers must submit Form 3115, Application for Change in Accounting Method.

Choosing a Tax Year

Taxpayers must figure taxable income on the basis of an annual accounting period for keeping records and reporting income and expenses.  There are two options when choosing a tax year.

Calendar year – This accounting period runs from January 1 through December 31 and generally may be adopted as the tax year by anyone.  There are some circumstances where the calendar year is required.

Fiscal year – This accounting period runs for twelve consecutive months ending on the last day of any month other than December.

The selected tax year must be used on your initial tax return (which may be a short-year return) and all subsequent returns unless you get IRS approval to change your tax year.

For more information or assistance with accounting methods and periods submit your question or comment via the form below:

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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