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@037 CHAP ZZ
┌─────────────────────────────────────────────┐
│ CASH BASIS TAX ACCOUNTING │
└─────────────────────────────────────────────┘
The cash basis of accounting (or cash receipts & 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 con-
sulting, professional services, real estate sales, etc.
The Tax Reform Act of 1986 has also disallowed use of the cash method
of tax accounting for "C" corporations (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 the new limitations on use of the cash method.