Filing & Paying Business Taxes (Part 11)

Filing & Paying Business Taxes

Continued from last week

Advance payments for services. Generally, you report advance payment for services to be performed in a later tax year as income in the year you receive the payment. However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. However, you cannot postpone including any payment beyond that tax year.

Advance payments for sales. Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. An agreement includes a gift certificate that can be redeemed for goods. Treat amounts that are due and payable as amounts you received. You generally include an advance payment in income for the tax year in which you receive it. However, you can use an alternative method.

Expenses. Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. 1. The all-events test has been met. The test has been met when: a. All events have occurred that fix the fact of liability, and b. The liability can be determined with reasonable accuracy. 2. Economic performance has occurred.

Economic performance. You generally cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Example. You are a calendar year taxpayer and use an accrual method of accounting. You buy office supplies in December 2006. You receive the supplies and the bill in December, but you pay the bill in January 2007. You can deduct the expense in 2006 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Your office supplies may qualify as a recurring expense. In that case, you can deduct them in 2006 even if the supplies are not delivered until 2007 (when economic performance occurs).

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