The most popular method of accounting is cash basis, primarily because of its simplicity. Reporting on the cash basis allows the business to report income as cash received and expenses as they are paid. Under the accrual method, income is reported in the year it is earned and expenses are either deducted or capitalized in the year they are incurred.
Cash basis tax reporting is best for companies who are in their growth phase where their accounts receivable grows each year and is in excess of their accounts payable and other accrued liabilities. This allows for a deferral of taxable income related to those receivables until actually collected. However, there are limitations on what entity types are eligible to report on the cash basis. With a few exceptions, C-corporations are generally not eligible to report on the cash basis method for tax purposes. However, many partnerships, limited liability corporations, and S-corporations are eligible to use the cash basis method for tax reporting.
For more information, please contact your Aronson tax advisor or Melissa Tarkett at 301.231.6200.