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Orlando
5971 Brick Court
Suite 100-B
Winter Park, FL 32792
407.679.7600
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2202 N. Westshore Blvd.
Suite 200
Tampa, FL 33607
813.507.3600
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Suite 300
Ft. Lauderdale, FL 33309
954.651.8044
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May 2012
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When It Involves Your Income Taxes,
Your Accounting Method DOES Matter
By Gary Colbert, CPA - Nperspective CFO -
Managing Partner Tampa
 Many clients we encounter have "grown up" over time utilizing many of the same methods and processes they established at the start of their businesses. One prevalent method we often find in practice is the utilization of the "cash method" of accounting. This method is the simplest way for businesses to keep track of their financial records, but with simplicity comes issues that are often not recognized until they become costly.
The cash method of accounting is essentially "managing the checkbook". It tracks all of the transactions a company has as cash is received or paid. There is generally no recognition of expected future payments from goods or services already sold nor obligations that exist that have yet to be paid. These latter issues are normally recognized, in financial statements, under the "accrual method" of accounting.
What can these differences mean to you, as the business owner?
Many business owners don't realize that this "cash vs. accrual" difference also exists when they file their income taxes. The Internal Revenue Service permits companies to file their income tax forms using either of these methods, but does not allow companies to change this method of reporting from cash to accrual, or vice versa, without prior approval from the IRS.
This cash vs. accrual distinction can make quite a difference in an annual tax bill, depending on the nature of your business. For example, we have encountered new clients within the past two years who are on the "cash method" of accounting for tax purposes who receive many of their customer payments in advance of rendering service to those customers. For tax purposes, under the "cash method" of accounting for tax purposes, these receipts are taxable when the monies are received. If these clients were instead filing their income taxes under the "accrual method" of accounting for tax purposes, no taxes would be due on these receipts until the goods were actually shipped or services were actually rendered to their customers.
For some of our clients, this simple change has resulted in the deferral of tens, and in one case, hundreds of thousands of dollars of income tax payments that would have otherwise been due to be paid in the current tax year.
While we at Nperspective are not tax experts, we are aware of many tax issues that face our clients, and with our knowledge of how your business operates, we can work with you and your tax advisor to help you identify ways to ensure that the tax consequences of your company's recordkeeping are understood so that you can use the tax code to your advantage.
Please contact Janet Watson at (813) 317-3460 or jwatson@npcfo.com for further information or a free consultation. |
| Did You Know? |
Did you know? Nperspective was recently engaged by a company to help them get their financial records and statements in order to apply for an SBA loan.
Contact Janet Watson for more information.
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Nperspective, LLC provides interim, part-time, and project CFO and Controller services using a flexible engagement model that is dependent on our clients' unique business needs. Our partners are seasoned CFOs who focus on rolling up their sleeves, are accommodating to client needs and helping create significant value from within their finance organizations.
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