Cash Basis vs. Accrual Basis Accounting Method: Which Is Right For You?

There is never a good time to talk about taxes and it isn’t the most exciting subject in the world. But when it comes to your business, there could be a way for you to mitigate significant taxes and create flexibility for your business. There are ways to defer your tax liability to a later date… do we have your attention yet?

The Tax Cuts and Jobs Act (TCJA) has made adjustments that allows more businesses to be eligible to use the cash method of accounting. Businesses reporting up to $25 million on an annual basis can qualify.

Is the tax reporting method you’re using putting your business in the strongest financial position?

Here at The Sharp Financial Group, we advise many of our business clients to employ the cash basis of tax reporting as opposed to the accrual basis of tax reporting. However, that might not be the case for everyone. Our job is to examine your business and see what choice is right for you.

Filing under the cash basis can offer you advantages versus using the accrual basis.

In general, the main advantage with the cash basis for tax reporting is revenue is reported when cash is received and expenses when they are paid. Uncollected accounts receivable is not included in revenue and unpaid accounts payable is not allowable as an expense. This tax reporting method would benefit growing companies that have accounts receivable in excess of accounts payable.

In addition, a company could accelerate tax deductible expenses by prepaying expenses, which could lower your current tax liability.

The accrual method may provide more of an accurate picture of a business’ financial performance. Reporting on the accrual basis may be essential when sharing information with banks, potential third-party investors and managing overall financial performance. The cash basis can still be used to report income for tax purposes. It does not preclude you from using both methods, depending on the reporting requirements.

Our tax planning season normally heats up beginning in October, but we’re working with you throughout the year to manage your tax position, using both methods for reporting to make sure you’re ready any scenario.

In addition to being your integrated financial services firm, we take pride in being advocates for our clients and their businesses and the trust they put in us.

If you are an entrepreneur and focused on growing your business and achieving financial success, please give us a call to discuss your situation further.