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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11140
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am a sole proprietor with a LLC business. I file taxes with

Customer Question

I am a sole proprietor with a LLC business. I file taxes with 1040 form and Schedule C. I use the accrual method for determining income for the business and the cash method for determining income for taxes. Is there any reason I could not use one for both? Also, I prefer to use the accrual method.
Submitted: 3 years ago.
Category: Tax
Expert:  Lane replied 3 years ago.

Customer:

Hi,

Customer:

Sure, many feel that using the accrual method using the accrual method, tends to be leveled out net income, avoiding income "peaks" that are subject to higher tax rates.

Customer:

And of course, most accountants feel that the accrual method is the only one that accurately reflects the true financial state of your business.

Customer:

However, there's one disadvantage; it 's more difficult to minimize taxes by shifting items of income and expense from one year to another under the accrual method.

Customer:

But yes, you most certainly can.

Customer:

IN terms of IRS procedure, see this:




Change in Accounting Method





Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. A change in your accounting method includes a change in:




  1. Your overall method, such as from cash to an accrual method, and




  2. Your treatment of any material item.




To get approval, you must file Form 3115, Application for Change in Accounting Method. You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. You may have to pay a user fee. For more information, see the form instructions.


Automatic change procedures. Certain taxpayers can presume to have IRS approval to change their method of accounting. The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9.
Customer:

Here's the form you'll need and the instructions: http://www.irs.gov/uac/Form-3115,-Application-for-Change-in-Accounting-Method

Customer:

Hope this helps

Customer:

Lae me know if you have any questions at all

Customer:

Lane

Expert:  Lane replied 3 years ago.


Hi Marseyas,

... just checking back in here, as I never saw you come into the chat.

Let me know if you have further questions.

Lane


If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer: replied 3 years ago.

I sent you a reply. I am not liking this site at all. there seems to be hidden time clocks that end chats with out notice and numerous bugs. Did you receive my reply message?

Customer: replied 3 years ago.

Sir,


Your answer was somewhat helpful but did not get at the core of my dilemma so I will try to explain and ask another way.


 


-I am using accrual method to run business and cash method for taxable income. Is this common or even legal?


 


-What should be the recognize method from the IRS if I am using two methods?


 


- How does the IRS know which method I am using? For example, all of my financial statements are prepared using the accrual method. Therefore, I believe my recognized accounting method is Accrual and using the cash method for taxable income is in error. Can you confirm my assumption here?


 


- Does my filing method have any bearing on this situation? Since I am filing as individual with schedule C?


 


 

Expert:  Lane replied 3 years ago.

My apologies ,,,, I waited for some time for you to come into the chat....(system sometimes gets glitchy in this way) ... but can still continue a dialogue there, just not in real time.

Yes, this is very common, especially with small businesses.

IRS assumes a cash basis for individuals. So for a single member LLC or sole proprietor cash method is VERY common

However, as mentioned above, sometimes even those using the accrual method to prepare their own statements for management and analysis purposes, continue to use cash basis for tax reporting as it allows for the ability to - under the doctrine of constructive receipt- defer cash receipts into the next tax year, for example.

Line F of the Schedule C tax form is used to report the accounting method of choice (for tax purposes), whether cash or accrual.

DO note, however, that if you have filed a schedule C in the past you will have already chosen an accounting method.
Expert:  Robin D. replied 3 years ago.
Hello and thank you for using Just Answer,
"How does the IRS know which method I am using?"
Your Schedule C determines what method you are using by your marking on the Schedule the method. that is line F on the Schedule C.
"What should be the recognize method from the IRS if I am using two methods?"
The Hybrid Method.
Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently.
However, the following restrictions apply.
If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. See Exceptions under Inventories, later. Generally, you can use the cash method for all other items of income and expenses. See Inventories, later.

If you use the cash method for reporting your income, you must use the cash method for reporting your expenses.

If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income.

Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code.
Expert:  Lane replied 3 years ago.

For clarity's sake, given the intervening post above I want to specifically answer each of you questions ... although I believe my original response did so.


You said:

"-I am using accrual method to run business and cash method for taxable income. Is this common or even legal"

Yes, this is legal, and this is fairly common. I might make sense, as mentioned in my first response, where you want to use the accrual method to get a clearer business/economical picture, but want to take advantage of constructive recepit for tax purposes.


You said:

"-What should be the recognize method from the IRS if I am using two methods? "

If you have not filed a schedule C before, you will indicate on line F what method you will be using for tax purposes. See this: Schedule C (Form 1040)




You said:

"- How does the IRS know which method I am using? For example, all of my financial statements are prepared using the accrual method. Therefore, I believe my recognized accounting method is Accrual and using the cash method for taxable income is in error. Can you confirm my assumption here?"

Again, you indicate to IRS how you want to report for tax purposes online F of schedule C




You said:

"Does my filing method have any bearing on this situation? Since I am filing as individual with schedule C?"

Only in that the schedule C IS where you indicate which method you will be using for tax purposes.



Here's are two excellent articles on the subject (and the links to the forms above (in the event youwant to chane your tax axxounting method will stay active):

http://smallbusiness.chron.com/cash-method-tax-schedule-c-20781.html

http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/tax-year-accounting-methods-impact-taxes.aspx




Hope this helps

Lane

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

 

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.