Accounting Methods Lawyer
As taxpayers earn income and take losses throughout the tax year, they must comply with specific IRS rules regarding how to report such factors on their tax returns. In some cases, their approach to accounting is determined by legal requirements; in others, taxpayers can opt for an accounting method that suits their unique situation. When you have the freedom to choose, your decision will follow you, since IRS approval is necessary to make changes. Combined, application of the various issues, requirements, and tax laws can be overwhelming.
At Lehman Tax Law, our team is dedicated to helping you understand the different accounting methods and guiding you to make informed decisions regarding your unique situation. We can explain the pros and cons of your options, and we will be at your side if you need to change your approach. Please contact our office to speak with an experienced accounting methods lawyer, and read on for an overview about the relevant legal concepts.
Two Most Common Accounting Methods
While there are multiple approaches to accounting for tax and bookkeeping purposes, most taxpayers choose from:
- Cash Accounting: With this method, you report income in the year you receive it and deduct qualifying costs in the year that you pay them. It is possible to receive actual or constructive income, depending on your circumstances. For instance, you would report income from a paycheck earned in December for that tax year – even if you deposit it after January 1.
- Accrual Accounting: If you take this approach, you report income for the tax year that you earn it, instead of when you receive the funds. You would also deduct expenses when you incur them, even if you do not pay until the following tax year. As an example, you would report a purchase/sale transaction during the tax year that you effect the agreement, rather than the date that you send the goods or receive payment.
For some taxpayers, the accrual method offers a more accurate view of a company’s financial picture in the relevant tax year. If your businesses generate more than $5 million in sales annually, you are required to implement the accrual method. Some taxpayers may qualify to use a hybrid of these two methods, though the details depend on your specific circumstances.
Accounting Methods and Your Tax Year
From the above descriptions, you can expect that a key definition is what constitutes a “tax year.” You have the option of going by a January to December calendar year, but you may also choose any other 12-month period as a fiscal year. IRS rules may require you to opt for one or the other. However, your choice is made when you file your first return in the absence of a requirement. As with accounting methods, you must obtain IRS approval to change your tax year.
Discuss Your Circumstances with a Skilled Accounting Methods Attorney
If you would like additional information and assistance with accounting methods, please call Lehman Tax Law today to set up a free consultation. You can reach accounting method lawyer Richard S. Lehman by calling 561-368-1113 or visiting our website. Once we review your circumstances, we can advise you on your options.