Filing & Paying Business Taxes (Part 10)

Filing & Paying Business Taxes

Continued from last week

Expenses. Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. This includes business expenses for which you contest liability. However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs under Uniform Capitalization Rules.

Expenses paid in advance. You can deduct an expense you pay in advance only in the year to which it applies. Example. You are a calendar year taxpayer and you pay $1,000 in 2006 for a business insurance policy effective for one year, beginning July 1. You can deduct $500 in 2006 and $500 in 2007.

Accrual Method

Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Income–General Rule. Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Example. You are a calendar year accrual method taxpayer. You sold a computer on December 28, 2006. You billed the customer in the first week of January 2007, but you did not receive payment until February 2007. You must include the amount received for the computer in your 2006 income.

Income–Special Rules. The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services.

Estimated income. If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination.

Change in payment schedule for services. If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.

This column is offered as a public service with the understanding that each person's tax situation is different; and that you should consult your CPA before taking any action based upon comments made in this article. Call me and I will be happy to explain my “CPA Quality Tax Preparation at H&R Block Rates”.  I can be reached at 825-2771.

Continued next week