Tag: Business Tax
Corp Tax Filing Deadline is March 15th 2020 - Things To Do
Sanjiv Gupta CPA - 4 months ago
Corporate Tax Filing deadline is approaching super-fast - only couple of days left. Sanjiv Gupta CPA talks about the do's and don't of corporate tax filing for year 2020. Watch this video if you have a S-Corp, C-Corp or own an LLC.Don't have the paperwork together? Pay estimated taxes and file the extension to avoid fees and penalties.
Qualified Business Income Deduction (QBI)
Sanjiv Gupta CPA - 5 months ago
Sanjiv Gupta CPA explains the basics of QBI (Qualified Business Income Deduction) for small business owner. You may qualify for up to 20% tax free business income. Watch this small 5 minute segment to understand the QBI Deduction.
You Can Deduct Up To 55.5 Cents a Mile in 2012
Sanjiv Gupta CPA - 8 years ago
Now you can deduct up to 55.5 cents a mile for business driving expense. You can use this rate for all kinds of vehicles including cars, vans, pick up and panel trucks. The rate increase was recently announced by the IRS for the year of 2012.You can deduct the actual cost of vehicle operation by keeping track of expenses. However, Standard Mileage deduction can be used by those who do not keep track of the actual costs. The standard mileage rate is determined by authorities using the annual study of the fixed and variable cost of automobile operation.In addition to the mileage rate, you can claim a separate deduction for expenses like parking fees or tolls. You can also deduct interest and state and local taxes relating to the purchase of the automobile.Please note when the standard business mileage rate is used, automobile depreciation will be considered to have been allowed at a rate of 23 cents a mile. This depreciation will reduce your cost basis in the vehicle.Where you cannot use the standard deduction?For the most part, standard deductions are a great place to start if you do not document each expense. However, in some cases, the standard deduction is not your friend. For example, you cannot use standard mileage deduction for automobiles used for hire like taxicabs. You cannot use the standard deduction of the vehicle that was previously depreciated by other than the straight-line method.We recommend you consult with your Tax Professional to ensure your deduction is calculated accurately.
Business Tax Strategy That Will Save You Money
Sanjiv Gupta CPA - 8 years ago
The wise follow the simple path. If your wisdom has failed to save on your tax-cuts then here is what you must do. If you are a “cash basis” taxpayer then you have to pay considerable attention to “time” your income and your deductions. Clear? Well, it simply means that you don’t have to pay taxes on incomes that you have not received. Also in the same manner if you make any expense on a tax-deductible commodity/product, then you can apply for a tax deduction and thereby cut down upon your taxable income.Common people are not all-knowledgeable about taxation policies. The obvious escapes them and in the stance to do something extra-ordinary they confuse things more often. Now, this is a bad and expensive habit. You can save a considerable amount of tax by simply timing your purchases.For example, Taxpayers who fall into the same tax- cohort for two consecutive years can shrink their taxable income by postponing income to the following year while calculating all deductions into the current year.For those who fear to jump into the larger tax-slab is required to do the opposite. It’s risky to negate future possibilities.Tax- riddle: suppose you have fallen under a 28% tax-slab category this year and the next year your ranking will go as low as 15%, your company needs a business computer. How will you time your purchase?Yes perfect! The current tax-year. That’s right. The best way of taking full advantage of the tax-slabs is to generate income and delay or deter expenses.A cautionary word: if you are a “cash basis” taxpayer then make sure you know what constructive receipt means. For example, your mail inbox has a pending check invoiced on December 31, 2011, but cant deposit it before 1 Jan 2012 then how are you to time your income? Simple calculate it under the 2011 tax-year.If you know how to time your income then your tax-slabs will come down automatically. Keep the deductible expenses for the year when you fall into the higher tax bracket. This plan actually works.Still confused, don’t worry – the staff at our office can help you time your purchases. Simply give us a call or send us an email.
IRS Declare No Reconcile of Reports Required On Credit Card
Sanjiv Gupta CPA - 8 years ago
IRS has pointed it out to a small business advocacy group that it was not a must for organizations to reconcile their tax reports with merchant card transactions on the latest 1099k information reporting form.The circular sent recently clearly brings out the fact that no reports would be required to be shown to the IRS on 2012 business tax forms or for forms in the coming year as well. In a previous circular, it was mentioned that no tax forms would be required on 2011 income tax returns and now it seems this has been extended as a general rule.The elaboration on the rule was a response to the query raised by Susan Ackerly, senior vice president of public policy of who wanted to know whether forms 1120 and other business forms require a reconciliation of gross receipts and merchant card transactions. The IRS deputy commissioner Steven T. Miller wrote in response to this that the reporting on gross receipts and transactions on the 2012 tax forms will be actually based on 2010 income tax forms. NO other changes concerning the payment card need to be reported.A pair of lawmakers, Rep. Aaron Schock and Bobby Schilling has recently protested against the Housing and Economic Recovery Act of 2008. The Act states that IRS will begin collecting forms of 1099-K from the third party entities which will include credit card companies and for merchant card transactions it will be credit and debit card payments. This form will reveal all credit transactions of a merchant’s business for the year before if they have exceeded $20,000 or 200 transactions for a calendar year.The lawmakers passed legislation against this Act in the Congress to prevent Congress from implementing this new reporting technique as they strongly believe that the IRS is using the 1099-K to exert extra pressure on small businessmen by asking them to show the report with the merchant’s own internal numbers. They also pointed out that when this reconciliation occurs, customers who ask for cask back, returning merchandise bought on credit for cash or gathering deposits on rentals, all will ultimately lead to a huge difference in facts and claims. This is so since small business is not properly equipped with advanced accounting software, bookkeeping technology, or time to conduct cross-reference or reconcile their internal numbers with the third party generated numbers. This entire process will actually lead to a huge accounting workload for small businesses.However, the IRS has responded to the concerns and claims of the lawmakers and also to those of NFIB. The bill also received huge backing from the US Chamber of Commerce as well. Thus, the NFIB and several other advocated achieved a huge victory last year when the Congress cancelled the extended requirements in 1099-K reporting. President Obama has signed the legislation supporting the concerns of the lawmakers.
How To Your Reduce AGI By $49,500
Sanjiv Gupta CPA - 8 years ago
Tax differed Retirement savings plans are huge tax shelters for individuals and small business owners. You may find it quite obvious nonetheless it is often overlooked. If you are looking into lowering your 2011 tax bill than here are a couple of options to consider.Profit-Sharing Contribution into 401(k) plan: Maximum Annual contribution limit for 2011 in the 401(k) plan is $49,500. However, as you may already know, the maximum amount an individual can contribute to their 401(k) plan is $16,500. Then what is a maximum of $49,500? This is an additional contribution that can be made on your behalf by your company into your 401(k) plan. For example, you contribute $16,500 and your employer may match 100% of what you contribute making the total 401(k) contribution of $33,000. For small business owners, this is a great tax shelter because they can contribute a maximum of $49,500 by using an individual $16,500 limit and matching $33,000 as profit share or bonus. This will directly reduce your AGI by $49,500. How is that for a tax discount? Moreover, a business can also deduct the additional contribution made to employee 401(k) as a business expense and reduce its own business tax liability. I would also like you to note that the deadline for C-Corp and S-Corp tax filing has already passed. Making any contributions to your employees 401(k) plan for the year 2011 will require you to file an amended tax return. What to do if you don’t have 401(k)? You can contribute up to $5000 in IRA. For individuals with no 401(k), IRA is the best option. You can contribute up to $5000 in IRA or $6000 if you are age 50 or older. Setting up an IRA is also very easy. You can simply contact any online brokerage to open up a new IRA account.I found a couple of very good examples of 401(k) plan options on the IRS Website.There are separate, smaller limits for SIMPLE 401(k) plans.Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2011, $16,500. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $16,500. He has enough earned income from his business to contribute the overall maximum for the year, $49,000. Greg can make a nonelective contribution of $49,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.Example 2: In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $5,500 of elective deferrals for 2011. His catch-up contribution could be split between the plans in any proportion he chooses. His maximum nonelective contribution to his solo 401(k) plan would remain $49,000 even if he contributed the full $5,500 catch-up contribution to this plan.In addition, the amount of compensation that can be taken into account when determining employer and employee contributions is limited. In 2011, this limit is $245,000; it’s $250,000 in 2012. Want one more reason to consider setting up 401(k) for your company?You can get up to $1500 in tax credit over the next three years ($500 credit each year for 3 years) for setting up a new 401(k) plan. This tax credit is offered to offset set up and administrative expenses into the plan. Your business must have less than 100 employees to take advantage of this plan.
Defending the “hobby loss” Rule with a Business Plan
Sanjiv Gupta CPA - 8 years ago
A business plan is very important where a business is concerned. As long as you have a business idea, you need to draft a business plan so that you can know how to set up the business. When a business is recurring losses, the IRS audits them. Also, the IRS reduces the inference or deductions claimed when a business is not set up to gain profit. The Internal Revenue Service has for many years defended ‘hobby loss” rule with a business plan. Listed below are some of the factors to consider like;Does the taxpayer rely on making an income from the current business?Has the taxpayer made some income from this business in previous years? If the answer is yes, how often has the business made this income and also how huge was the income?Has the taxpayer out aside reasonable time and also dedication to the business to show that he or she has plans of making some income from it?Has it been proven that the taxpayer has a tax plan of losing cash in the business to lessen its taxes from their main source of profit?Is this business used to employ family relations who are in lower tax groups?If the business in itself does not bring any income, does the taxpayer logically foresee generating income from the appreciation of equipment used in the business?Does the income reason for the business overshadow the fun parts of the business?If the business is generating losses, are these losses as a result of conditions out of the taxpayer’s power? Or, are those losses going at the start-up stage of the activity or business?Has the taxpayer made income from a comparable business in years gone?Does the taxpayer have the needed trade or activity understanding to go on with business success and also make the needed income? Or has the taxpayer seen or talked with other people who can provide the right routes and education to run the business very well?If the business is making any losses, has the taxpayer tried to modify its process to make better and enhance income?The secure harbor where the taxpayer is considered is if the business has generated some income in at least 3 years out of the last 5 years of its operation. When a business is not making profits like it should, there is a need for the IRS to come in and check if the reasons are beyond the control of the business. This helps to ensure that, the taxpayer is relieved of paying taxes.For every business, the survey will differ. This is because; every business will have a different issue from the other. So, not all the investigations come with the same results. Due to the fact that there are different companies and also businesses, there is a strategy for every trade or business type to get the best results. If you need a business plan, you may contact me at 510-709-4030.
Your Tax Credits and Deductions Are Expiring Soon
Sanjiv Gupta CPA - 8 years ago
The US congress and senate have a way of waiting until the last moment before making the many needed changes in legislation. In the year 2012, the country was just coming out of a deep international recession that affected the economy deeply. At that time, the congress and senate fell over themselves as they scrambled to try and save the normal Americans from feeling the effects of expiry on the tax breaks that they had gotten used to. This was then; however, the same situation seems to be in the offing at the end of this year. Most of the extensions that had been given earlier in 2012 are nearing their end with the collapse of this year, and as yet, few safety nets have been put in place to protect the common folk for when that time comes. Pundits point out that the delay in enacting changes in these laws or determining the direction that any fiscal interference from the government will take largely depends on the result of the presidential election. Well, the elections have come and passed, and the democrats had their way with regard to the presidency. As such, it is expected that such bills such as the Family and Business Tax Cut Certainty Act of 2012, which was approved by the Senate are going to sail through to the implementation stage.This is only half the solution; while the bill covers most of the extensions, there are some and albeit crucial parts of the bill that have not been looked at. This to some extent indicates the direction that congress may be leaning in relation to the tax breaks that have been the norm for a while now. The result will be a reaction that is part in full to what the market is used to. If this is the result, then it is expected that people are bound to tighten their belts, so to speak in the recent future.Initially, the bill took care of the tax provisions that affected individuals including restoring the alternative minimum tax (AMT) patch. The bill also took care of the deduction for state and local sales tax as well as the parity for employer-provided mass transit and parking benefits. Such provisions for these businesses include the extension of research and development credit in addition to the work opportunity credit. On the other hand, some of the things that this bill overlooked include the impending changes that are expected to happen on income, estate and capital gains tax rates.Recently, estimations by the Joint Committee on Taxation held that the renewal of this smaller list of provisions would have a net effect of costing more than $192 billion in loss of revenue from the fiscal year 2013 all the way to the fiscal year 2017. This is by no means a small number; however, the main question is “can the US economy handle such a loss at the moment?” If so, just what is the net return if such a move is undertaken?
Tax Rules for Hobbies and Businesses
Sanjiv Gupta CPA - 7 years ago
If you are a regular taxpayer probably you would beware of the fact that taxpayers treat hobbies and businesses in a different way. For starters, this article tries to explain how both of them are different from the perspective of tax payments.Let us consider two examples to understand this case better.Example 1: Assume that a particular individual is an Assistant track coach at a University, athletic coach for Nike and is associated with a lot of other coaching events related to tracking and field events. The individual is also into private coaching activities that help the individual earn money. Over the past decade, the individual has incurred huge losses. So according to Section 183 of the IRC, if the individual’s income is more than the deductibles, then it is taxable. Else the activity is considered a hobby and is exempt from tax though it is considered a ‘for profit’ activity. Some of the factors that weighed in favor of the individual were that his income was less than the deductibles and also the individual had devoted a large portion of his personal time to the activity which affected the individual’s marriage and life.Example 2: In this case, let us assume that the individual has been a very successful salesperson professionally and operated a sprint car racing activity as a hobby. The individual had a passion for racing activities and was actively involved in racing for various groups in the early days of his career. Finally, after racing for a few years, the individual purchased his own racing equipment which included a fleet of cars, a full-sized semi-trailer and a shop that was taken on lease. Recently when an audit was conducted, the individual claimed that he had incurred continuous losses for over a decade and hence could not pay taxes. The tax court, taking into account the maturity level of the activity and the sustained losses incurred by the individual ruled in favor of the individual. The court placed particular emphasis on the fact that that taxpayer indulged in the racing as a hobby and did not have an honest objective or goal to make profits through the activity. This is a classic ruling wherein the tax court clearly differentiated between a business and a hobby based on the intent and the profit motive of the individual.For taxpayers, it is essential to know the difference between a business and a hobby as the tax implications may vary depending on the context. Anything to do with a profit motive and where the income is more than the deductibles, the case gets slotted under a business rather than a hobby because there is money incurred as profit by the individual. A hobby is something that is purely pursued out of passion with no regard to profit and loss.If you are still confused, you could take the help of qualified CPAs to understand the context and the tax liability owed to IRS. It is always better to get things sorted out earlier than to struggle through after an audit by the IRS.
Small Business Tax Savings Credit Explained
Sanjiv Gupta CPA - 7 years ago
How to claim the Small Business Tax Savings Credit?The small business employers are given excellent benefits in the Affordable Care Act. These small business employers provide good health care plans to their employees and hence they are given tax credits to reduce the burden they suffer by providing the health insurance plans.What is the small business tax savings credit?According to the Affordable Care Act, small business employers, and small tax-exempt employers like non- profit organizations get a tax credit of 35% and 2% respectively for the years 2010 to 2013. These credits are due to increase correspondingly to 50% 35% in the year 2014. The scheme of offering such attractive tax credits is called Small Business Health Options Programs (SHOP).These tax credits can be carried back or forward to other years also thus helping small business employers in a big way. The health insurance premiums that they pay to employees are usually higher than the tax credits that they receive through the SHOP. In these cases, these employers can claim a business expense deduction for the premiums that they pay over and above the tax credit that they get. This is a double whammy for them, as they get both the credits and deductions that they are due to get.What exactly is a small business?The explanation of the tax credits mentions small business employers on every page. However, there are certain rules to explain to who this small business employer. To qualify for the double whammy, one needs to fulfill the following conditions: a) the employer needs to cover at least 50% of the health care coverage (single coverage and not family) for each of his employees. b) There must be lesser than 25 full-time employees in the business for it to be classified as a small business. Two half time workers can be considered as a 1 full-time employee and c) These employees must be paid less than $50,000 a year as wages.Claiming the creditThe small business employers can arrive at the tax credit that they are due, by using the IRS form 8941. This has to be then included along with the general business credit while filing the income tax return. The small business employers have a great advantage to carry their tax credits either backward or forward and use it as and when they require it the most. Using the help of a professional tax advisor can help in calculating the exact tax credits and maximizing the benefits of this option.All sufficient evidence supporting the facts should be submitted to the IRS to make it clear that the employer, who is qualifying for a tax credit, is indeed a small business employer. Once the IRS is fully convinced about the authenticity of the paperwork, then the tax credit gets approved and it reaches the employer at the time that they have opted. The additional deductions also help employers in a big way as they don’t feel the burden of huge healthcare expenses.
Thinking About A New Franchise Business
Sanjiv Gupta CPA - 6 years ago
Investing in a business is the fastest way of building a name for oneself in the market however, it is not easy to establish a credible name single-handedly. Almost everyone dreams of acquiring a reputable and successful business for themselves but nothing happens while one just sits and dreams. Every dream needs a proper outpour into constructive actions, which determine the conversion of that dream into reality. However, hard work is the catch in this story of success. People dream but their incentive to do hard work to acquire what they desire is weak and as a result, their dreams never get converted into real-life phenomena.You must always be aware that there is a definite downside of starting your own business. If your attempt at establishing proper business crashes, the loss experienced may be far greater than the initial investments. This may end up leaving the person in question in a state of critical bankruptcy. Therefore, the field of business is highlighted to be the best opportunity for people with a background in business or a mindset that comprehends the complexities that are associated with this field. The rest of the dreamers may not be blessed with the attributes that are required for the successful establishment of a business which can, in turn, lead them into an economic pitfall.Taking risks is a fundamental rule in the field of business. It is a sort of gambling where people fail and succeed every day. The odds may favor them one day or be against them the next. It is all a matter of destiny combined with experience and wisdom. There are several ways to kick-start a business. The safest method to achieve a successful career in business and the concrete establishment of your name at the forefront of a business empire is to utilize opportunities offered by a franchise business, rather than attempting to build your own brand up from scratch.Franchise businesses provide you with a complete guidance protocol that is essential for beginners. Through acquiring the chain of a particular brand name, you can work on establishing, as well as management skills while learning the perks of the whole system in the process. You will also be dealing with the experts and gaining valuable experience in the field.Franchise businesses are fundamentally businesses that have been handed over to entrepreneurs for marketing and management in a particular region or area. The owner passes over the legal temporary power to the entrepreneur that he chooses to make a deal with. The owner does this for a price and lets the entrepreneur use his brand name for establishing a business in the region. Of course, the owner is the one making more money than the entrepreneur in this case but as a starting practice for fresh entrepreneurs, this is the safest and wisest deal of all.There are two fundamental types of franchising businesses, one of which is product/trade name franchising, while the other one is business format franchising. In product/trade name franchising, as explained above, the owner passes the legal rights of the company to an entrepreneur. The entrepreneur then begins to establish a business in a region using the name of his brand for a price. In business format franchising the owner, also known as the franchiser, helps the franchisee (the entrepreneur) in acquiring the multiple, vital details that are required to set up a business.The franchising business comes with its share of risks as well. Numerous businesses have been announced as fraudulent after entrepreneurs took a risk and invested in a fake brand name without investigating the background of the possible franchiser. A complete and detailed investigation into the background and legal aspects of the franchiser is always necessary. The entrepreneur must also conduct a background check on his company setup, as well as the business assets that he boasts of having. Fraud is very common in this field and it manifests itself in a variety of ways, so if one is not careful he or she may end up on the wrong side of the bank which can potentially end up in lifelong bankruptcy.Identifying one’s strength is the key to success in a world of franchise businesses. The major factor one needs to focus on while contemplating an offer is how much is he or she willing to risk in investment. Next, the entrepreneur must be aware of his or her goals and aims which would lead the business to a destination and lastly, the entrepreneur must know what his or her strengths and weaknesses are.With the knowledge of one’s potential strengths, abilities, and drawbacks, it is easier to devise a strategy that would prove beneficial for a potential entrepreneur in the field of franchising businesses. Four ways to go about dealing with a potential offer before taking it, for a maximum success rate are:Utilize the professional help of an attorney and a CPA whose job is to provide you with the legal merits and aspects of a potential deal. Their professional expertise would enable you to visualize the smaller fine print, which would eventually grow to form potential problems for you in the business. With proper guidance and identification, those small obstacles can be obliterated.Identification of potential money and reputation deteriorating problems before making the deal is essential if one desires to avoid filing bankruptcy in the near future. A perfect and detailed investigation is the key to avoid such dilemmas.The knowledge of the history of the company as well as complete training in the art of franchising the particular product the franchiser entrusts you with is also essential, as well as beneficial.Acquiring the legal and financial history of the brand-name that one has been offered to the franchise is also one of the most important protocols one should follow up before signing a legal contract of acceptance. It is not easy to set up a business without a few smart moves but franchising is comparatively less risky than other businesses.
Business Travellers Tax Deductions
Sanjiv Gupta CPA - 6 years ago
You might be surprised at some of the business expenses that are tax-deductible for business travelers. It is important that you keep proper records and receipts. Handwritten notes are also important to keep track of the reason for the expense, name of the person who met with you, the date and location.There are many people who do not take advantage of all the deductions they are eligible for. Most of the time it is because they are lazy or do not keep proper records. All little extra time and organization can save you a lot of extra money.If you travel for business and your employer does not reimburse all of your expenses, you are able to deduct any expenses you pay out-of-pocket that exceed 2% of your AGI. If you are the business owner or are self-employed, you do not even have to reach the 2% threshold.Anything relating to your business is fair game including gasoline, airfare, fees for baggage, lodging, taxis, supplies, meals, and phone calls. You are even allowed to deduct your dry cleaning, laundry service or bar tab while you are traveling. The expenses have to be both necessary and ordinary. That means that they are typical business traveling expenses in your industry and necessary for your business. In other words, you need to prove you are trying to make money on the business trip.What Happens When You Mix A Business Trip With Pleasure?Business travelers need to be aware that the IRS is big on watching business travel-related expenses because they know there is plenty of room for manipulation. They come across many taxpayers that try to group personal expenses with business travel expenses. If you want to make the whole trip tax-deductible, you need to make the primary purpose of the trip for business. You are able to take some personal time.There is not anything wrong with mixing business with pleasure as long as you make the distinction very clear. Do not try to pass any personal expenses off as business expenses.Also, make sure that any conferences or conventions you attend are related directly to your profession or trade. The IRS wants to make sure they are really not disguised vacations. Make sure you keep any materials you receive at the convention.What Is Deductible As A Business Related Travel Expense?There are many things that you can deduct as a business-related travel expense. If you attend a seminar or conference that lists an optional excursion for meet and greet purposes, you can deduct the expense even if is a balloon ride or trip to a winery. You need to keep the paperwork from the seminar listing the excursion. The trick is to keep meticulous records of all the expenses you incur when you are traveling for business.If you cannot substantiate your tax deduction you will face serious penalties. In addition to losing the deduction and being required to pay the tax, you will have to pay interest and penalties. When your taxes are recalculated, you could get a 20% penalty for understatement if your taxes were understated by $5,000 or 10%.It does not stop there. If the IRS finds a discrepancy, they will question what other deductions are personal or bogus. It is hard to get them to stop once they start digging.
Business Tax Return Filings by Sanjiv Gupta CPA Firm
Sanjiv Gupta CPA - 6 months ago
We can help your business minimize taxes by implementing strategies that are being used by hundreds of companies across the United States. Most of our business clients are located in the San Francisco Bay Area, some operate their businesses from India, Canada, and other countries. Sanjiv Gupta CPA Firm can help you set up new corporate structure and advise you on which structure might the best fit to reduce your tax liability.Our firm is well known among the Desi Indian Community. If you are looking for a Desi CPA who also has expertise in the Indian Tax System than Sanjiv Gupta CPA is your ideal choice.
How to shield business using accrual accounting ?
Sanjiv Gupta CPA - 3 years ago
How Accrual Accounting Can Shield Businesses from Tax Payments Business owners like you should not only be hardworking and motivated. They must also be clever. From sourcing the cheapest materials to finding the cheapest labor without compromising the quality of their items; entrepreneurs have many ways of displaying their shrewdness. Being shrewd can give them the edge over their competitors.Managing the company’s finances is one area where business owners should be very clever. In particular, being familiar with the principal methods of keeping track of income and expenses—cash and accrual—would enable business owners to know which method of account is best for their business.And it’s simply not for complying with tax rules and regulations. Sometimes, being familiar with accounting nitty-gritty can save a business owner thousands of dollars for a fiscal year.Take, for instance, delaying taxes on a portion of their income for a year. There’s a very generous accounting rule that allows an entrepreneur or a company to delay paying taxes on a fiscal year.So say that you are a business owner, and the IRS would let you take a year to pay taxes on an income amounting to $11,000. You’ll have 12 months to produce $2,750 assuming that you have a tax rate of 25%. You could instead defer paying that tax and use the money to invest in advertising. Or maybe upgrade your equipment so that your business becomes more productive and profitable.Cash vs. Accrual MethodTo better illustrate how the accrual method of accounting can benefit business owners by letting them defer payment of a portion of their income tax, let’s look at the two methods of recording accounting transactions.In the cash method, the income is counted when your company receives money or check. Expense is counted when your firm pays for a service or product.Let’s cite an example so you can better understand. If you sell merchandise amounting to $500 to a customer in January and receive payment for it on March 1, you can record the income on March 1. This is because it was only on March 1 that you received the payment.This method is preferred and practiced by more small business owners. For one, it is easier to maintain. Business owners or their bookkeepers only record when the firm receives cash or pays cash out. It is straightforward and simple. It requires little record-keeping other than checkbook register and bank statements.But one disadvantage of this method is that it can distort the picture of your firm’s income and expenses. It won’t account well for situations wherein you have used credit to buy supplies or extend credit to your customers.It can also lead you to falsely believe that your business is experiencing highs and lows. For instance, if your company receives many payments for a month, you may think that the business is booming. But the reality could be that those payments came from sales that took place many months earlier.On the accrual basis, transactions are only counted when they happen. It doesn’t take into account the date the money is actually received or paid. There’s no need for you to wait until you see the customer’s money being transferred into your account, or you actually pay out of your checking account if we talk about expenses.In the accrual method of accounting, the job completion date is the one that matters. You can’t put the income down in your books until your business finishes a service or delivers all the products as specified in the contract. So if a job takes another 30 days for the finishing touches, it doesn’t have to go on the books until the 30 day period has lapsed.For example, your business is a leather repair shop. It has been commissioned to repair an antique leather couch, with the job completed on December 10, 2015. Your business bills the customer for $1,000, which you receive on January 10, 2016. In the accrual method of accounting, your business will have to record that income in December 2016 even though your firm has yet to receive payment from the client.The foundation for accrual accounting is the “matching principle.” This is the idea that expenses must be recorded whenever an obligation is incurred. When a firm makes a sale, the expenses needed to produce the item or provide the service must also be recorded in the same period—regardless of when the cash is paid.The strength of the accrual method is that it can tell you the health of your business. You would know if the company is booming or slowing down, depending on the number of orders or deliveries that it is posting for a certain period.But it won’t tell you what cash your business has on hand. This, in turn, could lead you to add debt that you can’t afford. Moreover, the accrual basis is very complicated for most small business owners. Shifting tax burdens using this method is also difficult for most entrepreneurs.Some small businesses try to get the best of both worlds, so to speak, by using a hybrid method. They use the cash method for income and expenses, and accrual basis for inventory as required by the IRS.Certain types of businesses are also allowed to use special accounting methods, like builders, contractors, farmers, and business owners who receive payments under long-term contracts.Saving on Taxes Using Accrual MethodWhile the accrual method can be complex for most business owners, it can be very useful for those who want to save on taxes. As mentioned earlier, large businesses use this type of accounting. Even small businesses with sales under $5 million a year can use accrual accounting. With the accrual method of accounting, business owners can reduce their tax burden or liability.In the accrual method, businesses can delay recognition of an income to a future tax year to reduce their tax liability for the current year. This explains what we mentioned earlier—that if a business has an income amounting to $11,000 for year 1, it can elect to defer payment of $2,750 in taxes for the said income to the next succeeding year.To better illustrate how accrual accounting can work to the advantage of small businesses in deferring tax payment, let’s cite a few examples.Usually, businesses include advance payments for the services in the tax year that they receive them. But they can also choose to declare that payment until the next year until the product or service has been completed.For example, a contracting firm uses the accrual method of accounting. It receives a $100,000 advance payment in December 2016 from a client for the construction of a house to be completed by the end of 2017. The firm has the option not to include the amount in its income for tax purposes for 2016, but instead declare it for 2017.The game goes for advance payments for goods and properties. Businesses can postpone reporting income from the advance payments they receive from properties they sell, lease, build, or install.For example, a magazine receives a 12-month subscription for its monthly publication. In November 2016, it received a payment of $120 from a subscriber who agrees to pay the entire cost upfront. The said firm can postpone reporting the income until the completion of the contract, or when it has completed delivering the magazines to the subscriber.In these scenarios, the companies can opt to use the payments they received to grow their businesses, like investing or buying new equipment.LimitationsHowever, companies who opt for accrual accounting have to follow certain rules if they want to defer recognizing income during a certain year.Generally, businesses are not allowed to defer the inclusion of advance payment in income for services that they are to perform after the end of the tax year following the year that they received the payment.To further illustrate this, a dance studio gets a two-year contract for 96 one-hour dance lessons. It received an advance payment for the contract in October 2016. The contract would stretch up to 2018. The company is thus obligated to recognize the payment in its 2016 income because part of the services won’t be performed until 2018 (or the year after the year it received the payment).Deferring reporting income is also not allowed if the company receives it under a guarantee or warranty contract. The same goes for income from prepaid rent.Other Benefits of Accrual AccountingAside from the flexibility that accrual accounting can afford to small business owners, there are other advantages or benefits that this accounting method can give to entrepreneurs.One is that it gives a better picture of a company’s financial performance. Accrual accounting allows the business owner to easily see how the company is doing as far as finances are concerned. He or she will be able to see where the profits are coming from, and where the expenses are going.Another benefit of accrual accounting is that a business owner would be able to track historical trends. Since accrual accounting can track revenue and expenses, it allows for a better way of tracking business activities. Business owners will be able to identify trends that are related to occurrences in the market place.Accrual accounting can also benefit the company by making access to credit easier. Since companies will be able to keep track of their financial performance with accrual accounting, they stand a better chance of getting access to credit from financial institutions. This is particularly important for small businesses that need credit to expand, and at times, to survive.Finally, accrual accounting would enable firms with annual sales of $5 million or annual inventory sales of $1 million to meet generally accepted accounting principles or GAAP. The latter is considered the industry standard for financial statement preparation. Meeting GAAP enables investors and financial institutions to easily determine a company’s financial health or standing.How to Change from Cash to Accrual AccountingNow that we have established that accrual accounting can enable a small business to defer paying of taxes under certain conditions, the next question you may have in mind is how to change from cash to accrual accounting.Changing the accounting method should be approved by the IRS first. To do this, you should file Form 3115 or Application for Change in Accounting Method. You’ll have to pay a user fee for this.You can also contact a business or commercial law attorney, or inform your accountant, about your desire to shift from cash to accrual accounting. These pros can help your business change to the accounting method that can increase your business’s profitability and shield it from taxes during certain tax years.The accrual method of accounting may be something you aren’t familiar with as a business owner. You may have been accustomed to the cash-basis that you can’t imagine shifting your accounting methodology anytime soon.But as you have realized upon reading this article, the accrual method of accounting can give you a lot of benefits. It can enable you to defer payment of taxes for a particular year. The money that could have been spent on tax payment can then be used by the business for initiatives like buying equipment and even investments.As a business owner, it only makes sense for you to study the nitty-gritty and even shift to the accrual method of accounting from a cash-basis method. While it is complicated and time-consuming, it can be very advantageous to your business. Aside from the tax savings, you can get, accrual accounting can enable your business to grow. You would be able to study better the financial health of your business and get access to loans from financial institutions.
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