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Text File | 1996-08-23 | 3KB | 67 lines

@037 CHAP ZZ

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

The cash basis of accounting (or the cash receipts and
disbursements method) is the simplest method generally in
use.  Under the cash method, for the most part, you only
report income when it is received (not when it "accrues")
and deductions generally are not allowed until an expense
is paid (except for expenditures that must be depreciated
or amortized over a period of years, whether or not you
have finished paying for them.  Thus, a business usually
does not have to report its accounts receivable at year-end
in income and cannot deduct its year-end accounts payable,
if on the cash method.  Obviously, if your year-end
receivables are usually larger than your payables, it can
give you a significant tax deferral if you are able to use
the cash method rather than the accrual method for tax
purposes.  Particularly since you can make a point of paying
off as much of your deductible accounts payable as possible
just before the tax year ends!

The cash method is not allowed for taxpayers with regard to
inventories where the purchase or sale of goods is a "material
income-producing factor" in the business.  Thus, it is usually
used by individuals and companies engaged in financial and
service businesses, such as consulting, professional services,
real estate sales, etc.

@IF143xx]Because your business is one in which the purchase or the
@IF143xx]sale of goods is a material income-producing factor, the
@IF143xx]cash method of accounting, at least in its "pure" form, is
@IF143xx]not available to @NAME.
@IF143xx]
@IF143xx](Some firms that have inventories may be allowed to adopt
@IF143xx]a "hybrid" form of accounting, where they report purchases
@IF143xx]and sales of inventory-related items on an accrual basis,
@IF143xx]while reporting service revenues or other income and expenses
@IF143xx]on a cash basis.)
@IF143xx]
@IF144xx]NOTE:  @NAME has no inventories.
@IF144xx]
The Tax Reform Act of 1986 has also disallowed use of the
cash method of tax accounting for "C" corporations (any
corporations other than "S" corporations) and for partnerships
that have partners that are C corporations.  However, small
C corporations (under $5 million sales) may continue to use
the cash method, if it is otherwise allowable, and even
large C corporations that are employee-owned personal service
firms (such as law, medical, accounting, architectural and
consulting corporations) are also exempted from this new
limitation.  Note that only C corporations, not S corporations
or unincorporated businesses, are affected by these
limitations on use of the cash method.

Your company, @NAME, is a @ENTITY.

@IF117xx]The average annual gross sales for the three preceding tax
@IF117xx]years for @NAME is:  @GROSS
@IF117xx]
@IF117xx]Because it is a "C corporation," you need to be mindful
@IF117xx]of the above restrictions on use of the cash method of
@IF117xx]accounting, as discussed above.
@IF117xx]