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Accounting MethodsWhen starting a business, you have to determine the method you are going to use for accounting and paying taxes. The two choices are the cash method and the accrual method.Cash Method If you are looking for simplicity, the I open a small business and have to order business cards and stationary. I receive the products and pay the invoice on November 18, 2005. Under the cash method, I can deduct the cost on my 2005 tax return. Some businesses are restricted from using the cash method. C corporations may only use the cash method if they have less than $5 million in gross revenues for a particular year. Professional Service Corporations can use the cash method without limit, while farming corporations can due so if gross revenues are less than $25 million. Tax shelters are prohibited from using the cash method. Accrual Method The Accrual Method of accounting is a bit more complex. Under this method, the focus in on the date the expense is incurred, not paid. Although this may seem Using our previous example, assume I order business cards and stationary on the December 18, 2005. I receive the products on December 30th, but don?t pay the invoice until January 20, 2006. When can the expense be claimed? It depends on when economic performance occurred. Generally, economic performance occurs when goods or services are provided to you. In the above example, economic performance would arguably occur when the business cards and stationary were delivered with the invoice on December 30th. Thus, I would be able to deduct the expense for the 2005 tax year. In Closing As you can see, the cash method is the easier of the two accounting methods. To determine the best method for your business, speak with a tax professional. Article Directory: http://www.articledashboard.com Richard Chapo is with www.businesstaxrecovery.com - recovering overpaid taxes for small businesses. Visit our article page - www.businesstaxrecovery.com/articles - to read more tax articles. Permalink: http://expert-talk.com/tips/774/accounting-methods-50774.htm Related Tips and Advices
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