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Richard, Tax Attorney
Category: Tax
Satisfied Customers: 53664
Experience:  29 years of experience as a tax, real estate, and business attorney.
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I formed a sole proprietorship LLC in 2012 and have reached

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I formed a sole proprietorship LLC in 2012 and have reached the end of the year with a net profit. These funds will be needed to operate in 2013 and deductible expenses in Jan/Feb. Can I pass this income to 2013 without paying taxes on it in 2012? If so, how?
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Good morning. Unfortunately, as a sole proprietorship, you are a cash basis taxpayer. As a result, you will have to report the operations of your sole proprietorship based on your cash received for 2012 and your deductible expenses actually paid in 2012. The IRS won't allow you to take expenses paid in 2013 and apply them against 2012 income.

This is the part of my job I don't like...when the law is not in favor of my customer. I wish I could tell you that you would be allowed to do what you proposed, but, I can only provide you information based on the law so that you can act on the best available information to you. I wish I had better news, but can only hope you recognize and understand my predicament and don't shoot the messenger. I'm sorry!

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Customer: replied 3 years ago.

Looking forward, then, is there a better business formation to minimize taxes? It seems silly that Dec/Jan forms a kind of magic point in the road where I am unable to carry operating income forward.

Thanks for following up. Going forward, you would want to pay the January and February expenses in December. Or, if there is going to be a loss, defer the payment of the expenses until the following year.
Customer: replied 3 years ago.

Sorry, I wasn't clear. Is there a better formation of my business that would allow me to carry income forward into a new year for operating expenses? I'm looking for the best setup from a tax perspective.

Thanks for the clarification. You could structure your business as an LLC and then elect the accrual method of accounting. Under the accrual method of accounting, an LLC recognizes income when it is earned whether or not it is actually payable, and generally recognizes deductions when they become payable whether or not they are actually paid.
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Customer: replied 3 years ago.

I think I signed up for the ongoing deal, so I think I can continue to ask questions. Let me know if not.


My understanding from your response is that I can count expenses in Jan/Feb on my 2012 taxes. (Perhaps I misunderstood this.) This should work fine since I'm just getting started and am not dealing with a lot of $$$ right now. However, I need to know how to handle this from an accounting and tax reporting standpoint. I use Quicken Business for record keeping and so far have been keeping a simple ledger, breaking different income and expense out using categories. Obviously, anything paid out in Jan/Feb will show for 2013. Any ideas?

No worries. You can only count in expenses for Jan/Feb for 2012 currently if you actually pay them in 2012. As a cash basis taxpayer, the key is when you pay them. I'm sorry if I was unclear earlier. Going forward, if you form an LLC and elect the accrual basis of accounting, then if they are due in 2012, you can deduct them in 2012 even though you may pay them later. I would recommend you keep your books using's a pretty simple double-entry accounting system that works well for small businesses.

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