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I open a little business & must order business cards & stationary. I get the products & pay the invoice on November 18, 2005. Under the money method, I can deduct the cost on my 2005 tax return.
If you are looking for simplicity, the money method is probably your best accounting choice. Generally, income & deductions can be claimed when payment is actually received or made. This is best shown with an example.
Accrual Method
Some businesses are restricted from using the money method. C corporations may only use the money method if they have less than $5 million in gross revenues for a particular year. Professional Service Corporations can use the money method without limit, while farming corporations can due so if gross revenues are less than $25 million. Tax shelters are prohibited from using the money method.
Using our previous example, assume I order business cards & stationary on the December 18, 2005. I get the products on December 30th, but don’t pay the invoice until January 20, 2006. When can the expense be claimed? It depends on when economic performance occurred.
The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a little difference, it can play havoc with your books & piece of mind.
In Closing
Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards & stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2005 tax year.
As you can see, the money method is the easier of the one accounting methods. To select the best method for your business, speak with a tax professional.
If you are looking for simplicity, the money method is probably your best accounting choice. Generally, income & deductions can be claimed when payment is actually received or made. This is best shown with an example.
Accrual Method
Some businesses are restricted from using the money method. C corporations may only use the money method if they have less than $5 million in gross revenues for a particular year. Professional Service Corporations can use the money method without limit, while farming corporations can due so if gross revenues are less than $25 million. Tax shelters are prohibited from using the money method.
Using our previous example, assume I order business cards & stationary on the December 18, 2005. I get the products on December 30th, but don’t pay the invoice until January 20, 2006. When can the expense be claimed? It depends on when economic performance occurred.
The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem a little difference, it can play havoc with your books & piece of mind.
In Closing
Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards & stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2005 tax year.
As you can see, the money method is the easier of the one accounting methods. To select the best method for your business, speak with a tax professional.
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