Discussion:Year end invoices
From TaxAlmanac
Discussion Forum Index --> Consumer Questions --> Year end invoices
| 9 October 2006 | |
| If a corporation issues an invoice on December 26th and it's paid in February of the next year, to which tax year is the income applied? | |
Action Jackson (talk|edits) said: | 9 October 2006 |
| Jc
It depends whether the corporation is on a tax basis or accrual basis. If the corporation is on the accrual basis, sales should be booked for the period in which they are mailed. If the corporation is on the cash basis, sales should booked in the period in which the cash is received. | |
| 9 October 2006 | |
| Also, it all depends on the accounting method that the corporation adopted. As "Action Jackson" stated above, they are two accounting methods
-Cash Method - The corporation reports income in the tax year received. Usually deducting or capitalizing expenses in the tax year paid. OR - Accrual Method - The corporation reports income in the year earned, even thought you may receive payment in a later year. Here you deduct or capitalize expenses in the tax year that are incurred, whether or not you may pay them that year. If the corporation need inventories you must generally use an accrual method of accounting for purchases and sales. See publication 538 for inventories. I hope it helps. | |
| 9 October 2006 | |
| Well, I haven't made a conscious decision to do one or the other -- my business has zero inventory, and is completely services based. I'll assume for now that it's a cash basis corp and that I'll only be reporting income received this year. Thanks for your help. | |
Michaelstar (talk|edits) said: | 9 October 2006 |
| In almost all cases such as yours - electing cash basis is the method of choice. It will be easier to account for and you will only end up paying taxes on what you have either received or paid for. Also, you may deduct expenses charged to a credit card as of 12/31 and not yet paid for because you are legally responsible for that expense. | |
| 10 October 2006 | |
| If you have filed a return and inadvertantly chose Accural on the return, when you really needed to select Cash Basis, what do you think the chances are that the IRS will accept on an Amended Return? | |
| October 11, 2006 | |
| Something to consider -- from a management perspective I like to know what my revenue and expenses are on a monthly basis regardless of whether I have received the cash or expended it. While it is true that many service organizations will elect the cash-basis of reporting for tax purposes, I chose accrual because I did not want to have to convert to cash basis at the end of every year. There's enough paperwork to do without adding that step to it. | |
