Page 15 - Tax Guide for Small Business

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Fiscal tax year. A fiscal tax year is 12 consecutive Cash Method 12:18 - 30-Jan-2020
months ending on the last day of any month except De-
cember. A 52-53-week tax year is a fiscal tax year that Most individuals and many sole proprietors with no inven-
varies from 52 to 53 weeks but does not have to end on tory use the cash method because they find it easier to
the last day of a month. keep cash method records. However, if an inventory is
If you adopt a fiscal tax year, you must maintain your necessary to account for your income, you generally must
books and records and report your income and expenses use an accrual method of accounting for sales and pur-
using the same tax year. chases, unless you are a small business taxpayer (de-
For more information on a fiscal tax year, including a fined later in this chapter). For more information, see In-
52-53-week tax year, see Pub. 538. ventories, later.
Change in tax year. Generally, you must file Form Income
1128, Application To Adopt, Change, or Retain a Tax
Year, to request IRS approval to change your tax year. Under the cash method, include in your gross income all
See the Instructions for Form 1128 for exceptions. If you items of income you actually or constructively receive dur-
qualify for an automatic approval request, a user fee is not ing your tax year. If you receive property or services, you
required. If you do not qualify for automatic approval, a rul- must include their fair market value in income.
ing must be requested. See the Instructions for Form 1128
for information about user fees if you are requesting a rul- Example. On December 30, 2018, Mrs. Sycamore
ing. sent you a check for interior decorating services you pro-
vided to her. You received the check on January 2, 2019.
Accounting Methods You must include the amount of the check in income for
2019.

An accounting method is a set of rules used to determine Constructive receipt. You have constructive receipt of
when and how income and expenses are reported. Your income when an amount is credited to your account or
accounting method includes not only the overall method made available to you without restriction. You do not need
of accounting you use, but also the accounting treatment to have possession of it. If you authorize someone to be
you use for any material item. your agent and receive income for you, you are treated as
You choose an accounting method for your business having received it when your agent received it.
when you file your first income tax return that includes a Example. Interest is credited to your bank account in
Schedule C for the business. After that, if you want to December 2019. You do not withdraw it or enter it into
change your accounting method, you generally must get your passbook until 2020. You must include it in your
IRS approval. See Change in Accounting Method, later. gross income for 2019.

Kinds of methods. Generally, you can use any of the fol- Delaying receipt of income. You cannot hold checks
lowing accounting methods. or postpone taking possession of similar property from
• Cash 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-
• An accrual method. ceived or made available to you without restriction.
• Special methods of accounting for certain items of in-
Example. Frances Jones, a service contractor, was
come and expenses. entitled to receive a $10,000 payment on a contract in De-
• Combination method using elements of two or more of cember 2019. She was told in December that her pay-
the above. ment was available. At her request, she was not paid until
You must use the same accounting method to figure January 2020. She must include this payment in her 2019
your taxable income and to keep your books. Also, you income because it was constructively received in 2019.
must use an accounting method that clearly shows your Checks. Receipt of a valid check by the end of the tax
income. year is constructive receipt of income in that year, even if
Business and personal items. You can account for you cannot cash or deposit the check until the following
year.
business and personal items under different accounting
methods. For example, you can figure your business in- Example. Dr. Redd received a check for $500 on De-
come under an accrual method, even if you use the cash cember 31, 2019, from a patient. She could not deposit
method to figure personal items. the check in her business account until January 2, 2020.

Two or more businesses. If you have two or more sep- She must include this fee in her income for 2019.
arate and distinct businesses, you can use a different ac- Debts paid by another person or canceled. If your
counting method for each if the method clearly reflects the debts are paid by another person or are canceled by your
income of each business. They are separate and distinct creditors, you may have to report part or all of this debt re-
only if you maintain complete and separate books and re- lief as income. If you receive income in this way, you con-
cords for each business. structively receive the income when the debt is canceled

Chapter 2 Accounting Periods and Methods Page 13