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Text File | 1996-11-06 | 2KB | 38 lines

@034 CHAP 8

         ┌─────────────────────────────────────────────┐
         │         ACCRUAL BASIS TAX ACCOUNTING        │
         └─────────────────────────────────────────────┘

Most large corporations (except S corporations and certain
"qualified personal service corporations") and any businesses
with significant inventories are generally required to report
income and expenses on the ACCRUAL BASIS for tax accounting
purposes.  The accrual method requires you to report income
when it is earned, rather than when it is received, in
general.  Expenses can be deducted when all events have
occurred that fix the amount (and the fact) of your business's
liability for a particular expense item, even though it may
be paid in an earlier year or a subsequent year.  However, if
"economic performance" required of the other party does not
occur until a subsequent tax year, you may not be able to
deduct an accrued expense until such economic performance
occurs, although there are some exceptions to this rule, such
as for recurring expenses.

Using the accrual method will often be less advantageous
than the cash method for tax purposes.  However, if yours
is a business in which most of your customers pay promptly
in cash, so that you have almost no accounts receivable,
but have significant accounts payable for various expenses,
the accrual method may actually be beneficial tax-wise, by
allowing you to accelerate the deduction of such payables.
This will result in a net tax deferral where the amount of
such payables is usually larger than your receivables at
year-end.

See the discussion of CASH BASIS accounting in this program
for tax law provisions that now REQUIRE many more taxpayers
(certain C corporations) to use the accrual method, rather
than the cash method of accounting.