Hi InnDryWall -
Never heard of those limits, but if they are IRS guidelines, I would assume they apply to how income taxes are filed -- on cash or accrual-basis, since the IRS cannot dictate accounting on your books.
Hey @Certified_Pro, tell us more, I'd love to get your insight.
@InnDryWall, so it seems safe to say that a mature business that has been around long enough to make a substantial amount of profit would definitely benefit from using accrual method. And, the little guy who opened the corner store who wants a challenge ><.
@Teri, please be kind, we want to open the discussion to all.
Perhaps instead of getting into the deep, "what kind of business," we can open the can of worms, everyone seems to be avoiding.
It does NOT matter what method we discuss here, or how you manipulate a report to your satisfaction, or who you call out on this forum.
In the end, how is the tax return being filed? all your work, all your COA's get narrowed down to only a few lines on the corporate tax returns. There are fantastic new IRS limits set at 25m that allow you to remain cash basis.
Now I handle a lot of restaurants/retail. We can spend all year messing with cash/accrual, or we can save a year's worth of work and go cash for tax purposes. I know a few in the accounting world that would burn me at the stake for saying this. In 20 years I have never had a restaurant audited and my financial projections are solid.
Do what works for you and the tax preparer, your client will thank you later.
There is cash or accrual basis for taxes and there is cash or accrual-basis for accounting is the distinction I am trying to make here, since there seems to be confusion that these are one and the same. You can do accrual for accounting and cash for taxes, or cash for both or can do accrual for both. Just know these are two separate decisions that every company must make and cannot just change randomly from month to month or year to year.
My apologies for being short. My full-time job is consulting for small businesses last decade, where I have an abundance of clients and truthfully make a ton of money, and largest part of what clients pay me for is to sort out messes they made on QuickBooks due to misguidance. So I am very passionate about trying to stop this at the source and thus my yelling here but I do apologize for seeming rude, especially when my overall goal is to help people for sure.
Just to clarify, cash vs. accrual does NOT depend on size of business. IRS rules dictate what is done on income tax returns only. What is done for accounting on your books can follow the same rules if you don't know any better or if no requirements by other factors, where I cannot speak for all industries and don't think anyone should pretend they know all to share which can cause major confusion for many and I see this every day. As I have mentioned, I know in my industry, which is a large one (Govt contractors, where companies have Govt customers). They are REQUIRED to do GAAP Accrual-basis Accounting even only one owner/employee.
IRS rules apply to all in the U.S. of course and true your odds of audit are slim as small biz as your dollars are not large enough in the big picture to be selected for audit based on size. However, audit selections are not all based on biz size. There are many red flags that trigger audits which apply to small biz but still you are one of many, so math odds are low, but when you have one or more of these red flags you are just as much at risk of audit even if small biz. Just a few of those are:
1) Reporting a loss -- Since this means you did not pay taxes and possibly got a refund and reporting a loss for multiple years can be even bigger red flag, since IRS is not stupid and knows you cannot stay in biz for many years without getting money from somewhere and most often that is revenue that should be reported. There are always exceptions to rules.
2) Company vehicle -- The rules on this are very specific and not what most people do. Even if you try to follow them, your odds of doing correctly are very slim even most CPA's do incorrectly or let me say, I have seen done correctly by 1 out of my 80 clients so odds are high if you have a company vehicle, you are reporting incorrectly on your tax returns. What I have seen, is many clients pay thousands of dollars to get this sorted out later and then pay thousands of dollars in back taxes plus penalties and interest costing them way more than the original tax deduction they took in the first place. So just for example, if you have both of these red flags on tax return (which is all tracked by computer now) your odds of IRS audit are definitely higher. The list of IRS red flags is long and I don't know them all.
I am not a CPA or EA, nor tax expert, in fact, and I don't do tax returns, not even my own so I am not soliciting for business here. I know this because I am a small business owner and advise other small business owners on Accounting (in my industry only) so I see the issues and my own tax lady is a former IRS auditor, which is the source of this valid information.
I have nothing against CPA's or EA's or anyone who does tax returns, thank God they do so I don't have to and gladly pay my tax lady to do mine and she is worth every penny I pay.
Unfortunately, the truth is that there are many sub-par CPA's who will never explain how this works. They are playing the odds that you will not get busted, since odds are good AND because even if you do get audited and busted, worst case they lose you as a client.
As business owner, YOU are responsible for knowing the tax laws and following them and YOU are the person who must pay the tax and penalties and interest due to any errors.
I was just asked this question in private message and thought might help others as well.
Question asked: Do you have any recommendations on learning GAAP accounting? Is there a certification? I have been preparing taxes for 20 years now and never needed GAAP but I think with my current clients it would be smart to apply GAAP accounting procedures. (I will also answer specific question asked for your very cool industry).
MY Answer: GAAP (Generally Accepted Accounting Principles) are what is taught when you get a college degree in accounting and some of what you are tested for on CPA exam. All who get a Bachelor's degree in Accounting are taught GAAP whether CPA later or not.
Many don't practice it for example if they later work for small biz on QB may not need and many even totally forget when they don't use it. CPA's who have license, in order to keep license active, must do annual updated training called CPE or license becomes inactive.
There are many many CPA's with inactive license, check on state website to look them up.
That does not mean they are bad people, we all forget things, just that to say you are CPA really must qualify that as Active or Inactive. Also fine to do accounting as Inactive CPA as long as you are not auditing "public" companies (which requires an Active CPA license).
I have never heard of any way to get certified on GAAP but not to say there is not one.
If you are a public company (selling stock to strangers on the stock market), you must do GAAP Accrual-basis accounting and must be audited by an external CPA firm and if you happen to be a Govt contractor, you must also follow GAAP accrual-basis accounting.
I wrote an article on this topic on LinkedIn that might be helpful that you can see on my profile as my very first article titled: "Do I Need An Accounting Degree?" If anyone is interested, here is a link: www.linkedin.com/in/theresawilt
Wow, how funny. Had no idea my picture was going to pop up there, so that is cool. Oh now I hate this cuz if you click on it, that takes you to a page to setup account you don't need.
If you just copy/paste link I typed in message directly into a browser search, like Google, it will take you directly to my profile for free and then just scroll down and on left in blue you will see link to all Articles and this was the first one I wrote so will be at the bottom of list you see.
Regina - No, accounting is not subjective for everyone, so please don't imply that it is.
My industry of Govt contractors is REQUIRED to do GAAP accrual- basis accounting.
So please refrain from implying you know what ALL companies are required to do since that is misleading and can very damaging to some, and costs many thousands of dollars if they rely on what you have said here, they can lose contracts and be forced out of business.
Refer to the IRS and US rules and code for direction on how a company should file their tax return.
Teri she clearly stated “FOR MANAGEMENT” purposes. Your passion is amazing but don’t let it cloud the complete picture. I read this entire post and you are literlly bashing everyone, why? If a company is silly enough to take an implied message on a bookkeeping thread, they probably need to shut it down. I handle large dollar clients as well and nobody is closing because of our management reports that look nothing like the tax based reports.
In QuickBooks Online you can choose how to run a profit and loss statement or balance sheet, cash or accrual. How transactions are entered into QuickBooks depends of the intent of the transaction. It may be to book a cash expense or an accrued expense, for example. How taxes are filed depends on the company formation and gross receipts per the US tax code and IRS rules.
Regina - I think it is great to share what YOU do for your clients, but to state that is what all should do, is misleading in my opinion since it is not true or correct to say you know all.
If you ARE NOT doing accrual-basis ENTRIES, accrual reports are incorrect/incomplete.
If you ARE doing accrual-basis ENTRIES, why would anyone want two sets of reports?
Tandy - Not bashing anyone, just saying people should not speak as if they know all when they don't as there are many people in this forum who use this guidance to do their accounting, not wise but true since I meet victims of online mis-guidance all the time.
This discussion started out implying that cash and accrual basis for books and taxes was the same thing, when it definitely is not. Book as in QB is different than Taxes as in IRS and are two totally different discussions and sets of rules to follow.
As I stated, IN MY INDUSTRY, Accrual-basis accounting is required on BOOKS not on taxes. So Govt contractors who do not do this, will either not be awarded contracts or can have them taken away if they cannot do proper accounting as required, and many start on QB getting guidance online from those who do not know those requirements and hurts them.
Thank you for this impassioned and invigorating conversation. We're really glad that everyone is able to share their perspectives and experiences. Accounting is complicated, and clearly, this conversation demonstrates the complexity of both the concept and practice.
I want to encourage everyone to continue this conversation and remain respectful. Thus far, everyone has stayed within these guidelines. It's easy to misread what's on the internet, just want everyone to keep things professional.
As I understand it, your industry has some very unique requirements that I am sure you will want to look into since they are also brand new and I hear many being disputed so likely subject to changes before everyone agrees, which will make that challenging for you. As I heard last many seemed unfair to your clients and they might want to join the fight to get things right before locked in. No doubt those business owners have been fighting for all the years I have been alive and so great to see they have succeeded, never thought I would see in my lifetime so very cool, but hate to see them get cheated on taxes or accounting rules that do not apply to others simply due to the nature of the business.
Agree with Rustler on this and is a point many seem to keep missing.
"Not really, what you are selecting is reporting on cash basis, the actual accounting you do is accrual based. If that were not true, and you actually could limit the accounting entries to cash based only - how would you be able to toggle from cash to accrual in reporting?"
If you are not MAKING ENTRIES on accrual-basis, there is no accrual-basis reporting.