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.
A previous post in our blog series for entrepreneurial attorneys focused on the importance of a solid business plan, and a critical part of that process is determining the entity structure for your new company. A law practice can operate in a variety of forms: sole practitioner, partnership, professional corporation, or limited liability company. A new practice’s choice of entity is an important decision that will have significant consequences for many years.
Aronson LLC can help you consider which entity is right for your practice. Contact Larry Rubin, CPA at 301.231.6200 or LRubin@aronsonllc.com.