Page 19 - Small Business Taxes

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
If you filed your first income tax return using the calen- Business and personal items. You can account for
dar tax year and you later begin business as a sole pro- business and personal items under different accounting
prietor, you must continue to use the calendar tax year un- methods. For example, you can figure your business in-
less you get IRS approval to change it or are otherwise come under an accrual method, even if you use the cash
allowed to change it without IRS approval. For more infor- method to figure personal items.
mation, see Change in tax year, later.
If you adopt the calendar tax year, you must maintain Two or more businesses. If you have two or more sep-
your books and records and report your income and ex- arate and distinct businesses, you can use a different ac-
penses for the period from January 1 through December counting method for each if the method clearly reflects the
31 of each year. income of each business. They are separate and distinct
only if you maintain complete and separate books and re-
Fiscal tax year. A fiscal tax year is 12 consecutive cords for each business.
months ending on the last day of any month except De-
cember. A 52-53-week tax year is a fiscal tax year that Cash Method
varies from 52 to 53 weeks but does not have to end on
the last day of a month. Most individuals and many sole proprietors with no inven-
If you adopt a fiscal tax year, you must maintain your tory use the cash method because they find it easier to
books and records and report your income and expenses keep cash method records. However, if an inventory is
using the same tax year. necessary to account for your income, you must generally
For more information on a fiscal tax year, including a use an accrual method of accounting for sales and pur-
52-53-week tax year, see Pub. 538. chases, unless you are a small business taxpayer (de-

Change in tax year. Generally, you must file Form fined later in this chapter). For more information, see In-
1128, Application To Adopt, Change, or Retain a Tax ventories, later.
Year, to request IRS approval to change your tax year.
See the Instructions for Form 1128 for exceptions. If you Income
qualify for an automatic approval request, a user fee is not
required. If you do not qualify for automatic approval, a rul- Under the cash method, include in your gross income all
ing must be requested. See the Instructions for Form 1128 items of income you actually or constructively receive dur-
for information about user fees if you are requesting a rul- ing your tax year. If you receive property or services, you
ing. must include their fair market value in income.
Example. On December 30, 2021, a client sent you a
Accounting Methods check for interior decorating services you provided to
them. You received the check on January 4, 2022. You
An accounting method is a set of rules used to determine must include the amount of the check in income for 2022.
when and how income and expenses are reported. Your Constructive receipt. You have constructive receipt of
accounting method includes not only the overall method income when an amount is credited to your account or
of accounting you use, but also the accounting treatment made available to you without restriction. You do not need
you use for any material item. to have possession of it. If you authorize someone to be
You choose an accounting method for your business your agent and receive income for you, you are treated as
when you file your first income tax return that includes a having received it when your agent received it.
Schedule C for the business. After that, if you want to
change your accounting method, you must generally get Example. Interest is credited to your bank account in
IRS approval. See Change in Accounting Method, later. December 2022. You do not withdraw it or enter it into
your passbook until 2023. You must include it in your
Kinds of methods. Generally, you can use any of the fol- gross income for 2022.
lowing accounting methods. Delaying receipt of income. You cannot hold checks
• Cash method. or postpone taking possession of similar property from
• An accrual method. one tax year to another to avoid paying tax on the income.
You must report the income in the year the property is re-
• Special methods of accounting for certain items of in- ceived or made available to you without restriction.
come and expenses.
Example. A service contractor was entitled to receive
• Combination method using elements of two or more of a $10,000 payment on a contract in December 2022.
the above. They were told in December that their payment was avail-
You must use the same accounting method to figure able. At their request, they were not paid until January
your taxable income and to keep your books. Also, you 2023. They must include this payment in their 2022 in-
must use an accounting method that clearly shows your come because it was constructively received in 2022.
income. Checks. Receipt of a valid check by the end of the tax
year is constructive receipt of income in that year, even if

Chapter 2 Accounting Periods and Methods Page 13