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Cash or Accrual Basis?


Most business report income and expenses on one of two different tax basis systems: Under the CASH method, you report income when received, and expenses when paid. Under the ACCRUAL method, you report income when earned, and expenses when you incur the obligation to pay them.

Even under the Cash method, you generally cannot write off goods or supplies purchased for resale until you actually sell the items. The difference is maintained in "Inventory" which is an asset of the business.

Most sole proprietorship sales or service businesses use the CASH basis, since it is the easiest to deal with, and you do not fall into the situation of paying tax on income you haven't as yet collected. However, if you are engaged in manufacturing products for resale, or if income would be materially distorted if you report on the cash basis, the Internal Revenue Service may require that you use the accrual basis. Professional guidance would be a good idea.


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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017