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Ed Johnson
Ed Johnson, Tax Preparer
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We have a small consulting business, and were just paid for

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We have a small consulting business, and were just paid for a past due invoice amounting to around $10,000. I want to be sure I have paid for some business expenses with it, but don't know what the cutoff date is for 2008; faintly remember we can count expenses after 12-31-08 somehow, into January. Or is that just having to do with banking dates, cleared checks, etc.   ??
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Thank you for your question.

 

If you are on cash accounting, you have to take your expenses in the year paid for.

 

You have to count your revenues in the year received.

 

Now the issue iwth cleared checks and the like is: you are considered to have constructive receipt in the year the check is given you to you. so you could receive a check on december 31, and it has to be included in 2008 income, even if it is not cashed at the bank until 2009.

 

You can only count expenses into the next calandar year under two circumstances:

 

1. You are on accrual accounting.

 

2. If you have net operating losses, you can take those looking back and then forward.

 

Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction.

 

Under cash accounting you take expenses when they are paid, and you count cash when it is constructively received.

 

If you are already on cash accounting, which mos tsmall businesses are, then you can only change with the approval of the IRS.

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
so........we are a 2 person business. the 10,000 that just came in will count as income and I have no way to offset it. Do I understand you correctly? We are a subchapter S and if I use it to pay taxes tomorrow, it won't count as a writeoff. Will taxes paid in 2009 count as 'expense' this year? ~ or do we just 'lose' 1/3 to taxes?
Expert:  Ed Johnson replied 5 years ago.

Dear Mwlfqo,

 

As a sub chapter S, you have to pay yourselves a pay check using form W-2. that paycheck has to be reaonable. This is a payroll expense.

 

Now you have some accounts payable that have apparently paid you 10K during 2008. it has to be counted in 2008 income and reported on your 1120-S. http://www.irs.gov/pub/irs-pdf/f1120s.pdf

 

it will be allocated between you as a distribution. (K-1)

 

Now you have until the filing date of your taxes plus any extensions to contribute to your SEP and KEOUGH plan, and have it count for 2008. so you can make sure you have made maximum contributions to those accounts.

 

I do not understandn your refernce to the tax payment in 2009. Are you meaning that you are suggesting you pay 2009 taxes tomorrow, or are you say you would be paing 2008 taxes owed in 2009?

 

Customer: replied 5 years ago.
Sorry, I meant to say that I owe quarterlies/all for 2008, and am trying to find a way to distribute the recent big check legally so that at least part of it can show up as a deduction against the upsurge in income just now received/deposted in late Dec 08. Probably the contributions to our IRA/SEP account(s) will help...we haven't paid ourselves, aren't set up to do it yet, as most of our receivables go toward paying both personal and business bills. Thanks for your time.
Expert:  Ed Johnson replied 5 years ago.

Dear mwlf,

 

Thank you for your feedback and comments.

 

You will treat these quarterly payments the same as you would anyother. So your estimated tax liabilty for the fourth quarter would be a bit higher. BUT remember, the IRS will allow you to avoid the January 15th quartelry payment if you can file your return by February and include the total amount due with your return.

 

Also, you needed to have opened the SEP/Keough accounts by December 31's. But have until the filing deadline with extensions to fund them. So if you have not established your SEP/Keough yet, then your only other option is if you have an IRA account somewhere you can contribute to. You have until March 15th for that option as well.

 

this is one of those rare instances that accrual based accounting may have helped you. But for a onetime issue, I do not think the complexity of it would be justified.

Customer: replied 5 years ago.
thanks!
Expert:  Ed Johnson replied 5 years ago.

Dear MW,

 

You are welcome. let me know if you have anyother questions on this issue while the question still open.

 

Ed

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